Southern Copper Corporation (SCCO) Q2 2013 Earnings Report, Transcript and Summary

Good morning and welcome to the Southern Copper Corporation’s Second Quarter and Six Months 2013 Results Conference Call. With us this morning, we have Southern Copper Corporation’s Mr. Raúl Jacob, Vice President of Finance and CFO, who will discuss the results of the company for the second quarter and six months 2013, as well as answer any questions that you might have. Key information discussed on today’s call may include forward-looking statements regarding the company’s results and prospect, which are subject to risks and uncertainties. Actual result may differ materially and the company cautions do not place undue reliance on these forward-looking statements. Southern Copper Corporation undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events, or otherwise. Our results are expressed in the form of U.S. GAAP. Now, I will pass the call on to Mr. Raúl Jacob. Raúl Jacob Ruisánchez: Thank you very much, Trisia and good morning everyone and welcome to Southern Copper’s second quarter 2013 earnings conference call. Participating in today’s conference are Mr. Oscar Gonzalez Rocha, Southern Copper CEO and Mr. Daniel Muniz, Grupo Mexico’s CFO. In today’s conference call, we will begin with an update of our review in the metal markets. We will then talk about Southern Copper’s key results related to production, sales, operating costs, financial results, expansion projects and capital spending program. After that, we will open the session for questions. Focusing on the metal markets, during the second quarter of 2013, 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, despite some fundamentals for this market, we maintain our view…

Thank you. (Operator Instructions) Our first question comes from Santiago Pérez-Teuffer from Credit Suisse. Please go ahead. Santiago Pérez-Teuffer – Credit Suisse: Hi good morning Raúl, Daniel, and Oscar and thanks so much for your time. I have two questions, the first one is related to Buenavista, is the floor affecting mine, still affecting productions currently, and do we care effect on this quarter? : Raúl Jacob Ruisánchez: Okay. Let me focus on the Buenavista production profile. We have identified the source of the flooding and we are already correcting that. By the end of this month July, we expect to have a major control on the production of Buenavista. If we achieve that, production should go back to the plan that we have for the year that was to produce about the same that we did in last year in Buenavista. However the tons that are already lost will not be recoverable through 2013. Regarding the Toquepala investment, let me ask Mr. Oscar Gonzalez to comment on it please.

Yes. In the Toquepala investment we are just investing right now in the order of $85 million for the year that include the improvement in the technological arrangement in order to substitute this railroad with the [companion] on the new grinding equipment. And that too in addition that is what is going to reduce the $5.5 million that was mentioned. And this will be used later on by the expansion of Toquepala, mainly the [companion] and with the addition of another second grinding equipment. The [other pin] that is involved in the investment is the new chops for the talks and the auxiliary equipment because the whole chop was inside the expansion of the mine, and for that reason we need to construct a new one and that is $26 million for this year. And the other pin is the new warehouse and some solicitation that we’re going to build. That made the $75 million, $80 million for this year, but we are not spending anything in the new expansion of the Toquepala for producing 100,000 tons until we have the approval of the community and of the government of the environmental impact study. Santiago Pérez-Teuffer – Credit Suisse: Oscar, if I may as a follow-on, what is needed for this approval, looking only at published theory or you just have to submit another AIA and when will you expect to do this? Thanks so much.

No, the AIA is already submitted since last year and the only thing that we will need to do again because we’ve canceled is the public hearing and that we expect to have it maybe in this third quarter of this year in order that we can start construction after the approval by the Minister (inaudible) maybe at the beginning of the year because we already have all the engineering for this project. Santiago Pérez-Teuffer – Credit Suisse: Thanks so much and good morning to everyone. Raúl Jacob Ruisánchez: Thank you very much for your questions, Santiago.

Our next question comes from Thiago Lofiego from Merrill Lynch. Please go ahead. Thiago Lofiego – Merrill Lynch SA CVTM: Hi, good afternoon. I have two questions. First one, on the projects in Peru, if you could give your view on how this stricter regulations in Peru might affect your upcoming projects, and also if you could give an update on the potential timing for the Toquepala and Cuajone projects. Those would be nice if possible. Raúl Jacob Ruisánchez: No, regarding the Toquepala we just mentioned that it will be – we expect to have the project moving forward with the – find the audience in the third quarter and with the initial construction of the project by the first quarter of next year. About the new environmental standards, well we have expressed our concern and then standardize, lowest in the word at this point. And I think that it is something that will affect investments in metallurgical facilities, in copper metallurgical facilities specifically in Peru. But currently we don't have any specific plans to spend our smelter or refinery. So it's mainly – we’re expecting a correction in the standard because we think that these are unrealistic. Thiago Lofiego – Merrill Lynch SA CVTM: ?: Raúl Jacob Ruisánchez: Yeah, well we have the Toquepala project that really was comment and the Tia Maria project. In the Tia Maria, we're working on the environmental impact study that requires a certain work with the communities before we submit it to the government and we're on that phase and at the same time in parallel, doing work with the local communities for getting the approval of the project. Thiago Lofiego – Merrill Lynch SA CVTM: Okay. Thank you. And my last question is about the cost outlook, we have seen some cost pressures over the last couple of quarters. What’s the outlook going forward, should we see a normalization of the operating cost or what’s – the outlook there. Raúl Jacob Ruisánchez: What we’re seeing that in the last few months, the total cost in dollars, is decreasing given the reduction in certain costs. However, that’s very dependent on what happens with the fuel cost which is very important for us. And energy, meaning by diesel, electricity, electricity were reducing our cost, we expect to reduce our cost of the Mexican operations due to the PTA that the company have signed with the new plants constructed by Grupo Mexico, that will supply power to the company. We generally speaking, we’re not seeing that much cost pressures as we have seen since a year-ago, at the same time and that is something that we believe will be favorable. Thiago Lofiego – Merrill Lynch SA CVTM: Great. Thank you. Raúl Jacob Ruisánchez: You’re welcome.

Our next question comes from Leonardo Correa from HSBC. Please go ahead. Leonardo A. Correa – HSBC: Hi, good morning and good afternoon everyone. Thank you. My first question is regarding hedging. We’ve seen the company in the past hedging on part of copper production. I just wanted to know, I mean given recent volatility in copper price has ran potentially more volatility going forward, at least for the next two years. I just wanted to know if hedging part of copper production would be an option? And my second question is regarding M&A and clearly the company has been very focused on organic growth. Has a very interesting pipeline of projects, I just wanted to understand given recent Tier 1 assets that have been put up for sale and mainly improve on the copper side, I just wanted to understand what the recent spends on M&A is now from the company. Thank you, guys. Those are different questions. Raúl Jacob Ruisánchez: Okay, let me ask Daniel Muniz to comment on your question. Thank you very much for it Leonardo. Daniel Muñiz Quintanilla: Sure, thank you Leonardo. Well, first of all regarding testing as you know, I mean, in the past we don't have a real policy in sense of hedging. We tended to pitch this different, look at the markets, do our analysis, look at our cash flow and CapEx, and the financial structure and capital per share for the company and the sites that you hedge at some point. We have not hedged growth drivers and we believe in the strong fundamentals of copper. Where we commented, we've seen a lot of different inflows from China and which I believe, we do believe in the fundamentals. We are experiencing how tough it is to put additional accounts of copper out there, so we were passing the bill. We have not decided to hedge. Regarding M&A, I mean, in the quarter we were seeing a lot of targets coming through these, I mean, probably it’s part A. There a lot of benchmarks like (inaudible) since it wasn’t commented. Then the other part is that’s our addressable sales we have been targeting on organic growth. We believe given the strong asset base of Southern Copper and having a strong position in cash cost of the industry. It's difficult to close the transaction until we acquire another asset given our pipeline. As far as the brown fill projects that we're going through, but the projects comes in the way and to us and to our shareholders of credit, we were definitely we are entertained the analysis, the due diligence et cetera, but nothing to report at this point. Thank you for the questions. Leonardo A. Correa – HSBC: Okay, very clear. Thank you very much. Raúl Jacob Ruisánchez: Thank you.

Our next question comes from Carlos de Alba from Morgan Stanley. Please go ahead. Carlos F. De Alba – Morgan Stanley & Co. LLC: Thank you very much gentlemen. My first question is regarding cost again, I mean, it was particularly concerning to see the operating cash cost of by-products jumping to $2.10 per pounds. But I would like to understand, if you can quantify the impact of the Buenavista situation adding this increase, can you tell us how much either on a profound basis or on a dollar basis, it increased your cost in the second quarter? Raúl Jacob Ruisánchez: Well, all in total Carlos we lost about 5% of our production related to the Buenavista copper production. The concern, is that even though we did reduce our production by about 5% directly from Buenavista, is that we still spend pretty much the same amount of money in terms of the total expenses related to copper production at that site. So it was spending pretty much the same with less production. What we are seeing is it’s a mix of different elements. I already mentioned some of them when we talked about the change in costs, and the foreign effects. Let me give you some more details. In terms of diesel and fuel, we had a cost increase of $8 million in the quarter. Power was about $7 million. On power, I forgot to mention that we are adjusting our cost improved through consumption of lower power as well as fuel. In Mexico we’re expecting a reduction coming from the new tariff that we will pay when the current power plant start operations at full capacity. On other expenses that affected cash costs we have operating materials increasing by $28.5 million in the quarter. And very important we had…

And the next question comes from Marcelo Aguiar from Goldman Sachs. Please go ahead. Marcelo Aguiar – Goldman Sachs: Hi guys thank you for the opportunity for the call. A bunch of my question was already asked, but couple of two additional Mr. Raúl, can you talk a little bit about the discussion on the new tax in Mexico, where I mean, do you have any view in terms of the implementations, schedule, how it's going to be coagulated over EBIT or revenues. So that's going to the first question. I'll make the second question afterwards. Raúl Jacob Ruisánchez: On the Mexican royalty, it was approved by the House of Representatives in the past (inaudible) where currently the summer break of the Mexican Congress, and we are expecting this to be at the Senate in the fourth quarter of the year. But what was passed was the royalty based on EBITDA. This is not a finished law that has to be applicable. So, at this point we’re waiting to see, what’s the end result of this discussion about new legislation in Mexico. Daniel Muñiz Quintanilla: And let me just add there Raúl if I may. I mean, I guess though our company position is that there shouldn’t be any special tax on mining given though that Mexican exquisite regulation works, profit sharing works. I mean, given the way all the tax invested in the mining companies were paid, I mean, I think it’s not fair to judge the mining industry elsewhere or worldwide in the same way. So, I mean, rounding off, but the Mexican Chamber of Mining has been doing strong, continuing lobbying with those of the (inaudible) in order to try and make a more stable and the investment spending reduced. So that’s really the official position that…

Our next question comes from Marcos Assumpção from Itaú BBA. Please go ahead. Marcos Assumpção – Itaú BBA: Hi, good afternoon, everybody. First question is related to Buenavista expansion. If you could comment how long it will take after the start up to ramp up the capacity of Buenavista – on behalf of this brownfield project? And also the potential impact on Southern Copper's cash cost after the implementation of the project? And also, if you could comment on the markets and dimensions as well you mentioned earlier in the call you're not hedging. You believe in the market and the copper price, we believe the market is relatively high. If you could comment a little bit on the second half of the year, what's your view right now for prices and also for 2014 as well if you can? Thank you. Raúl Jacob Ruisánchez: Okay. Let me start by the Buenavista question. We have here two projects, the SXEW III trend that we will be operating next year in Buenavista and a new concentrator. In the case of SXEW III plant, we have the ramping up of these kind of facilities is relatively fixed. By that I mean that once you finish the plans and you have it at the commissioning during that period you usually increase the production very quickly in the quarter. Okay, so if we finish the plant and see in the second by the end of the third quarter this one should be up and running at full capacity. That is what we are expecting. In the case of the concentrator, the new concentrator, it may take a little bit longer than that about six months to reach full capacity and we will enjoy benefit of its production through the second half of 2015. And…

Our next question comes from Autumn Graham from Barclays. please go ahead. Autumn Graham – Barclays Capital, Inc.: All of my questions have actually been asked thanks.

Our next question comes from (inaudible), please go ahead.

Yeah hello, thanks for very interesting presentation. I wanted to ask about smelter capacity on the Caridad, I understand there is some refurbishment work going on there at the moment. I was wondering any increase in capacity was expected from that work, and then looking into the future? Raúl Jacob Ruisánchez: No, we don’t have any specific plans to expand the capacity in Caridad. Not yet.

Okay. I was going to say, looking into the future with capacity of Buenavista including, whether you had any plans including smelter capacity in that area? Raúl Jacob Ruisánchez: Well, the company, it’s looking to build a new smelter in a different site mainly in (inaudible) in Mexico. That is a project that we have been developing in the last few quarters, but there is nothing to report at this point on this matter.

Okay. Thank you. Raúl Jacob Ruisánchez: You’re welcome.

Our next question comes from Alfonso Salazar from Scotiabank. Please go ahead. Alfonso Salazar – Scotiabank: Thank you. I just want to share with you, what’s the EBITDA production value that you’d expect us for Cuajone, after all the projects are finished. It seems to me that it should be increasing to 180,000 tons but in the press release it says that, production is, it’s not a 211. So I was wondering if you can clarify it. Raúl Jacob Ruisánchez: All right, thank you for your question. Hold on a second please. I know we’re expecting, you’re in the number, we’re expecting to produce about 180,000 tons in Cuajone. Once these projects are finished, I’m considering that we already are investing in new equipment to maintain our ore grade as well as the slowest stability in the right standard of the Company. Alfonso Salazar – Scotiabank: Thank you. Raúl Jacob Ruisánchez: You’re welcome.

Our next question comes from (inaudible) from FBR Capital Markets. Please go ahead.

Good afternoon guys and thank you for all the color on the production and CapEx guidance. Just a follow-up question on the project evaluation analysis, when you think about going ahead with these projects even if its $2 copper price, does that take into account, drawing down on the cash balance and probably borrowing some issuing additional debt to fund those projects or is it just purely from operating cash flow and just cash balance? Raúl Jacob Ruisánchez: Well, we did an bond issue in November of last year. Our cash needs were currently have very safe cash position that will protect us in case of a market (inaudible). And on that base, we won’t consider at this point that we will requiring additional cash at this point. Daniel you may want to comment on that as well. Daniel Muñiz Quintanilla: Thank you, and the exit price are lower ones very 2 to you guys, I mean what happens if copper price dropped dramatically, hence how strong was the position of the company yesterday even on the reduction circumstances. Yeah, we get issue on the number (inaudible) and in order to guarantee (inaudible) projects capital structures have to be analyzed and rolled into normal basis independent of market condition. So keep on our capital structure, but the $2 mentioned by Raúl was mostly without additional debt and without paying dividends, just to give you an idea of how strong our financial position is today. Thank you.

Well, and does that assume any meaningful improvement from the cost side, because I know when we are talking about a $2 copper price, product crude oil is not going to be $105 or $110 or something like that. Does that take into account the benefits on the cost side as well? Raúl Jacob Ruisánchez: Not. We haven’t made any specific assumption, let’s say, on fuel prices or some other key material prices. So that will be in our favor in the sense that we do know that if we face a very low price copper scenario that should also pull down some of the prices, but we are not considering that in our outlook.

Okay, great. Thank you very much, guys. Good luck. Raúl Jacob Ruisánchez: Thank you.

Our next question comes from Mandeep Singh from JPMorgan. Please go ahead. Mandeep Singh Manihani – JPMorgan Securities LLC: Hi, thank you. Hi, Raúl. My question is related to the Quebalix IV project, which was added to the final list of topics. Could you please provide some more details about the project, its timeline and the benefits that we expect to see after this investment is completed? And the second question is related to the expected timeframe to complete the construction at Toquepala after the approval of [this] and when do you expect the production to begin there? Thank you. Raúl Jacob Ruisánchez: You’re welcome. Thank you very much for your questions, Mandeep. In the case of Quebalix, generally speaking the Quebalix facilities have two significant benefits for the company. The first one is that, by reducing the size of the material the mineral that will [leached] we’ll get more copper out of them. That’s the first benefit. And the second one is that we have a quicker recovery of the material of the copper contained in the mineral. Generally speaking, in the case of these portable leads, it will accommodate our production as a three SXEW plants that we will have in Buenavista. Two of them are already operating and have the Quebalix III to supply material for them. The third one, it’s requiring this kind of facility to maintain the production levels that we’re expecting from it. So, roughly speaking, we are expecting to have a more stable production coming from the SXEW portion of the Buenavista facilities. Could you remind me your second question please? Mandeep Singh Manihani – JPMorgan Securities LLC: Yes. You mentioned the Toquepala. Raúl Jacob Ruisánchez: The Toquepala expansion is expected for the first quarter of 2016 to start production. Condition, as I said in this case, to approval this year of the environmental impact study, and the concurrence of the local communities. We’re expecting those two approvals in order to move on with the projects. We are not doing anything until the project has these appropriate approvals. Mandeep Singh Manihani – JPMorgan Securities LLC: Thanks, Raúl. Raúl Jacob Ruisánchez: You’re welcome.

Our next question comes from Pedro Fuenzalida from Larrain Vial SA Corredora de Bolsa. Please go ahead. Pedro Fuenzalida – Larrain Vial SA Corredora de Bolsa: Yes, good morning. Hi, Raúl and everyone. Yes, two questions. The first one is, what is behind the reasoning in the capital items from 1.8 to 1.6, is this highly leases in projects or just lower CapEx. And second one is on the physical premiums that we are seeing and that being jumping especially from the second quarter and how well-positioned are you in Southern Copper to take advantage of these or if you are massively committed in long-term contracts? Thank you. Raúl Jacob Ruisánchez: Thank you very much for your question. Regarding the CapEx, now we are maintaining our capital budget as indicated. It's worth about $6 billion for this year. Now it's $6.3 billion and the addition is a new project, the Quebalix III that I addressed in the prior question. Pedro Fuenzalida – Larrain Vial SA Corredora de Bolsa: Sorry. Well, just particularly on the 2013 from 1.8 to 1.6? Raúl Jacob Ruisánchez: Just postponing the certain expenses and payments, when you do the budget you have an idea of how much, what kind of amount of money you need, but once you are through the year you will start negotiating with your vendors of equipment and constructors of the facilities and then you establish a committed path for CapEx. So in some cases it's a little bit of a postponement in expenses that has been already committed. In some other cases, it's just a delay in the time that you will receive for an equipment. So that's why we’re even though we spent about $700 million in CapEx in the first half of the year, we're expecting to spend more than that, about $900 million in the second half of this 2013. Pedro Fuenzalida – Larrain Vial SA Corredora de Bolsa: Okay, thank you. On the physical side please? Raúl Jacob Ruisánchez: Yes, on the premiums that you mentioned, well we generally speaking, we have the firm contracts that are for the year and has specific commercial conditions related with them. So even we are seeing their opinions on particularly on refined copper, but those who will be achieved through our spot sales that are reduced portion of our total sales. Pedro Fuenzalida – Larrain Vial SA Corredora de Bolsa: In general, how much do you leave for this book market? Raúl Jacob Ruisánchez: I am sorry. Pedro Fuenzalida – Larrain Vial SA Corredora de Bolsa: Which portion is left for this book market? Raúl Jacob Ruisánchez: It varies from year to year and we don’t disclose this information. Pedro Fuenzalida – Larrain Vial SA Corredora de Bolsa: Okay, thank you.

We have no more questions in the queue at this time. Raúl Jacob Ruisánchez: Well, if we don’t have any more questions, I would like to well conclude our conference call for the second quarter results. We certainly appreciate your participation and expect to have you back with us when we report the third quarter results in October. Thank you very much and have a nice day.

Thank you ladies and gentlemen, this concludes today’s conference. Thank you for participating, you may now disconnect. Raúl Jacob Ruisánchez: Thank you very much Trisia.