Southern Copper Corporation (SCCO) Q1 2013 Earnings Report, Transcript and Summary

Welcome to the Southern Copper Corporation First Quarter 2013 Earnings Results Conference Call. My name is Lorraine, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I would now like to turn the call over to Mr. Raúl Jacob. Mr. Jacob, you may begin. Raúl Jacob Ruisánchez: Thank you very much, Lorraine. And good morning, everyone, and welcome to Southern Copper's First quarter 2013 Earnings Conference Call. In today's conference call, we will begin with an update of our view on the metal markets, and 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 session for questions. Regarding metal markets and prices, during the first quarter of this year, metal markets continued to be driven by some negative macroeconomic events that affected consumer expectations. The most important ones for basic metals was the slowdown of China's economy and the continuing low consumption in Europe. Regarding the copper market, even though we believe this metal's fundamentals are sound, its price has been affected by concerns about Chinese growth, LME stock increases and macroeconomic worries related to the U.S. fiscal deficit and Europe's debt crisis. Of these factors, the increments in the London Metal Exchange and other warehouses' inventories are creating some concerns regarding the copper market balance. We believe this is part of the commodity cycle and a temporary event. We expect, in the following quarters, a recovery of demand, particularly from Asia, which currently represents approximately 60% of the world demand. Regarding China, its GDP is growing at almost 8% per year. Generally speaking, due to its urbanization process, China's GDP growth produces a corporate demand growth higher than its…

[Operator Instructions] And our first question comes from André Pinheiro from Itaú BBA. André Pinheiro - Itaú Corretora de Valores S.A., Research Division: I have 2 quick questions, the first on cash cost. We saw a steep increase in the first quarter. I'd like to know how should we expect cash cost to evolve going forward in the following quarters. And my second question actually would be, if you can tell us how we should expect dividend payout ratio to evolve going forward, given your intense CapEx plan. Raúl Jacob Ruisánchez: Okay, let me focus on the first one, regarding cash cost. The $0.12 increase is something that we were expecting when we did the plan. At the time of our first conference call this year, we indicated that we were expecting this is due to cost inflation, but at the same time, we're expecting to have a bigger contribution of byproduct production, particularly from molybdenum and zinc, that will help us in controlling our cash costs. Our current goal is to maintain cash cost after byproduct credits at around $0.90, $0.91. For the next quarters, when we will have the benefit of the new molybdenum plant in Buenavista, that is completed in the investment part of the plant and we're about to start production of it, we are expecting better contribution from molybdenum from volume. Regarding prices of byproducts, obviously, we have to wait to see where the markets are. That's our current expectation. On the second question, it's basically up to the board. The company is focusing in developing the projects that we are moving forward with at this point. And as I say, when I comment on this, it's basically a review on the cash position of the company, how the board perceives will be the market in the next few quarters and what are the kind of payments that we need to do in the next few quarters. On that basis, the board discusses and approves a dividend, if that's the case.

And our next question comes from Felipe Hirai from Merrill Lynch.

So my first question is regarding CapEx. We have seen CapEx lagging the $1.8 billion guidance for the year in the first quarter. What do you expect this to -- what do you expect the trend to be in the next quarter? Do you expect this to revamp over the remaining of the year? And also, my second question also regarding CapEx. When we look at CapEx in Peru versus Mexico, we've seen CapEx much lower in the Peruvian projects. Do you expect this to normalize going forward? Is there any trend that we could -- we can see there, maybe CapEx a bit lower than you were expecting? Raúl Jacob Ruisánchez: Thank you very much for your question, Felipe. Regarding the total CapEx, we are maintaining our guidance. And the reason for that, even though, if you, say, multiply it by 4, our expenses for the last -- for the first quarter, that would make the $1.8 billion. We're expecting a more aggressive capital spending in the next few quarters. The reason for that is that, in general -- generally speaking, once the budgets are approved, our personnel start operating on the approval that they have received, and usually, it has picked up in the trend in the quarters 2, 3 and 4 of the year. On the Peruvian capital expenditures, basically, we are developing the projects that I mentioned in Toquepala and Cuajone. Regarding the expansion projects, we have -- we're working with the local communities in Toquepala. We expect to have some good results to report in the next few quarters, but we're not yet there. And about Tia Maria, we're currently working with our -- with the team that is preparing the environmental impact study. Until we present this study, we can't spend any money on the project, so right now, we're basically working on the Environmental Impact Assessment for Tia Maria. So as we move on into the year and we get the approval of these projects with the concurrence of the local communities, we will start spending money. But we need to have all the permits and the concurrence of the local communities in order to go ahead with the capital expenditures on the expansion of Toquepala and the Tia Maria project.

And our next question comes from John Tumazos from Very Independent.

John Tumazos, Very Independent Research. I was very interested in your favorable view of the copper market. Obviously, financial markets have been a little nervous and undervalued mining equities in the last few months. Should we interpret from your statement that there's a 100% likelihood you're going to make acquisitions of undervalued copper properties? And how much money do you think is an appropriate amount of money to set aside for such purposes: $500 million, $1 billion, $2 billion, $3 billion? Raúl Jacob Ruisánchez: Okay, John, we are not considering any acquisitions at this point. The company has a positive view -- a positive long-term view on the copper market. And obviously, if there is a good opportunity in the market, we will take a look to it, but that doesn't mean that we're currently having something in that matter or any specific intention. If you see the size of our reserve base, you will understand that we're mostly focused on organic growth, to develop at full capacity the current reserve that the company has. We believe that, that will provide the significant value to our shareholders.

And our next question comes from Richard Kraut [ph] from JP Morgan.

My question is with regards to Buenavista. Since it's going to become such a critical part of your operations, about 40% of your copper production by 2015, do you see the lower ore grades that you're getting in this quarter are going to be an issue going forward? Raúl Jacob Ruisánchez: No. Buenavista will have a more stable ore grade and even slightly higher ore grade in the next few years. What we're seeing now it's what I call a bump in the road, nothing to worry about the ore grade in the long term. It's going to be relatively stable and slightly higher than what we're seeing now for the next, let's say, in 12 months from now or so.

And our next question comes from Santiago Perez from Crédit Suisse. Santiago Perez Perez Teuffer - Crédit Suisse AG, Research Division: My question is regarding cost. Can you give us some color as to what effect will SCC get from the savings in energy relative to the combined cycle power plant in Mexico? Raúl Jacob Ruisánchez: Yes, thank you very much for your question, Santiago. We're expecting to have savings in the range of $25 million from the new power plants that will feed energy to our Mexican facilities. One of them will start operations in June. These are investments made by Grupo Mexico, and we will be consumers of power in this case. And the other one is for 2014. Both, together, will help in reducing our current energy cost. Santiago Perez Perez Teuffer - Crédit Suisse AG, Research Division: Okay. So should we assume $25 million per plant or in the aggregate amount of both? Daniel Muñiz Quintanilla: That's per plant. That's per plant.

And our next question comes from Marcelo Aguiar from Goldman Sachs.

Some of my questions was answered already. But when I look to your CapEx figures, I mean for Angangueo, and maybe if you can discuss a little bit Toquepala. How much, I mean, are you already -- I mean, can we see further CapEx inflation on Angangueo? Or I mean, have you already, like, precontract majority of the services and machines for the project? And on the Toquepala side, if you can give you -- us a more up-to-date view on the total CapEx for this project. Raúl Jacob Ruisánchez: Yes. In the case of Angangueo, we were -- we did an adjustment in the budget when we increased the size of the concentrator. That was in the third quarter of last year. Currently, we don't have any plans on that matter regarding Angangueo, and we expect to maintain its current budget. Obviously, there is some pressure on capital goods cost that will affect the project as well because we haven't contract 100% of the CapEx for the project. Regarding the Toquepala expansion, I think that, in this case, we are working currently with the authorities and the communities in order to get the approval of the project. Our current estimate of cost, it's about $1.2 billion for the project. However, whenever we have the final go to the project, we will prepare a detailed budget that would be approved by our board, and that will be the one that we will speak to. At this point, what we have is an estimation of $1.2 billion of total cost of the project. With this, the project still has very good economics for the company.

Okay. My last question is on the Tia Maria environmental assessment. Can you refresh our -- I mean, what is your main barrier on advancing this project? And how the -- why, I mean, the environmental assessment is taking so long, I mean, to be finalized? Raúl Jacob Ruisánchez: Let me keep that question at this point because we are currently working with the local communities and the authorities in order to move on with the project. I prefer not to give some details on this.

And our next question comes from Daniel Rohr from Morningstar.

How ought we think about potential economies of scale at Buenavista with the various expansion projects? I guess, how much do you expect the unit costs before credits to decline as we see output increase, considerably holding constant the impact of improving ore grades? Raúl Jacob Ruisánchez: Thank you for your question, Daniel. I think that this is a project where operating cost is very, very competitive. Generally speaking, we think that since ore grade will be very stable in the next few years, we don't believe that we will have a cost increase, but the opposite economies of scale in this specific case. That should benefit our cash cost long term. At this point, we are moving forward with the investments, and we expect to wait and see the final cost. But we believe that it's going to be very positive for the company and with a positive impact on our cash cost long-term.

No sense of magnitude of prospective unit cost improvements that you'd like to share today? Raúl Jacob Ruisánchez: The total cost of the company should decrease by about $0.05 per pound, considering the current level. But that may change significantly regarding if there are changes in prices and operating materials as well.

[Operator Instructions] And at this time, I am showing no further questions. Raúl Jacob Ruisánchez: Thank you very much, Lorraine. Well, we conclude our conference call for Southern Copper's first quarter's results. We certainly appreciate your participation and expect to have you back with us when we report the second quarter results in July. Thank you very much, and have a nice day.

And thank you, ladies and gentlemen. This concludes today's teleconference. Thank you for your participation. You may now disconnect.