Good morning and welcome to the Southern Copper Corporation’s Fourth Quarter 2018 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 fourth quarter 2018 as well as answer any questions that 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’s undertakes no obligation to publicly update or revise any forward-looking statements, 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, and good morning to everyone and welcome to Southern Copper’s fourth quarter of 2018 and full year earnings conference call. Participating with me in today’s conference are, Mr. Oscar Gonzalez Rocha, Southern Copper’s CEO and Board Member; and some executives of the company. In today’s call, we will begin with an update on our view of the copper market. We will then review the Southern Copper’s key results related to production, sales, operating cost, financial results and expansion projects. After that, we will open the session for questions. Now let us focus on the copper market, the core of our business. While the copper price increased from $2.80 to $2.96, that is a 5.7% increase in 2018. During the last quarter of last year, the copper price decreased from an average of $3.09 in the fourth quarter of 2017 to $2.80, that is a 9.3% reduction in fourth quarter of 2018. Even though we see a good physical market for copper, we believe the falling prices of the prior quarter reflected the sentiment of a possible escalation of trade protectionism between the United States and China. We expect a recovery in copper prices in the coming months. In 2018, refined copper demand growth was approximately 3%, on the supply side there was no significant disruption due to labor negotiations or technical difficulties leading to an expected growth in supply of approximately 2.5%, much higher than the 1.5% forecast by analysts at the beginning of 2018. Even though the market wasn’t balanced with these marks, there was a significant reduction of copper inventories in 2018 reflecting the refined copper scarcity. From it’s March peak of 1.4 million tons, as of February 11, that is as of yesterday, inventories in the major warehouses decreased to 826,403 tons,…

[Operator Instructions] Our first question comes from the line of Carlos De Alba from Morgan Stanley. You may begin.

Good morning, Raul and Oscar. Thank you for taking the call. So we read over the weekend that there were very heavy rains in the Cuajone area and in all of the southern part of Peru, could you please give us an update on what is the situation of your mines, Toquepala and Cuajone and the other logistics operations like the railway and maybe Ilo if that has also been hit by heavy rain? That’ll be one question. Second question has to do with Tia Maria. And I guess, if you could maybe Raul or Oscar give us an update as to what makes you believe that this – the permit will finally come in the first half of 2019, the Government of Arequipa seems to be anti-mining in its rhetoric so that could complicate the process? And then finally, you have to understand that in Tia Maria, the company has done a lot of work around the communities and providing incentives for them to be – to accept the projects, so why is it taking too long to receive the permit? My understanding is that the federal government is ready to give you the permit whenever you want, and is more perhaps the company not feeling that it is to get the time to go ahead with the project? So any color there will be great. And then finally, if I may ask, could you share some more details behind the transaction, I guess, related-party transaction that led to the extraordinary dividend paid to the non [indiscernible] shareholders?

Okay. Thank you very much for your questions, Carlos. Let me start with what happened in last few days at the Southern Peru and the Southern Copper, particularly operations. We had unprecedented rainfall in the southern region of the country. Just as an indication of this, the Peruvian Government declared a state of emergency in the regions of Tacna, Moquegua and Arequipa in Peru on February 8, that is last Friday. The heavy rains costs several massive landslides, engulfing structures in their path, and causing serious damage to the areas of these mentioning regions. One of the landslides occurred near the company’s Quebrada Honda tailings dam on Toquepala, and result in the disappearance of the company team. We’re currently making any all possible efforts to locate the employee and provide relief and support to his family. As a result of this unusual situation, the company implemented its emergency response plan as a precaution and as a precautionary measure temporarily stopped production at the Cuajone and Toquepala operations on February 11 until yesterday. Yesterday, we have resumed operations partially, and I will give some details in a minute. We have full procedures to ensure the integrity of the Quebrada Honda tailings dam, and we’re confident that no tailing spills have occurred. The Peruvian Environmental Agency, OEFA is currently assessing the events arising from the forces of nature with the company’s full cooperation. Additionally, SCC is currently supplying heavy machinery, drinking water and other supplies to regional government and local municipalities in the most affected areas. As I said, the southern area in Peru has suffered these higher levels of rainfall that were the highest in the last two decades. Now focusing on our operations. As I mentioned, we are initiating – we already initiated production yesterday. Currently, our Toquepala and Cuajone…

Thank you, Raul. My name is Jorge Lazalde, I’m the acting secretary for Southern Copper Corporation. In summary, the transaction that was questioned by one of our minority shareholder was related party transition between Grupo Mexico subsidiary of Southern Copper, regarding the project of the construction of power plants that are in Sonora, so that complaint was based on the fact that the shareholder considered that we’re going to comply with the forum or the internal procedures we were supposed to follow. And then on the other hand, the company have to sustain that perhaps without considering the fact that we didn’t comply with the forum that there was never, never, damage to the minority shareholders. So having explained that to the plaintiffs, the defendants and the plaintiffs got together to counsel and before reaching court or trial, we decided to settle this case. And the result out was Raul already explained.

And just give me a follow-up there. And if there was no wrongdoing, why settled?

The decision that the company made was to avoid a confrontation or litigation. I cannot reveal all the terms that were discussed between counsel and the company. But the fact that we have been involved in these types of situations before, we consider that the best course of action was to settle despite the fact that we have always stated that there was no damage at all. I think it’s exactly opposite, the result of the project that was questioned by the shareholders at the end of the day has been translated into an economic benefits for Southern Copper Corporation and its shareholders.

Understood. Thank you. And Raul if I may, just coming back quickly to Tia Maria. So if in the event that Tia Maria dossier receive the construction permit by August, and then it has to be sort of put on hold until the company files again or redos the environmental impact study. What are the implications of that scenario in terms of dividends, because CapEx will be lower, and presumably, the free cash flow generation will be greater this year and otherwise, will the company consider paying that excess free cash flow as dividends? Or would the company accelerate exploration or works in the Michiquillay project, and use the CapEx that otherwise would have gone into Tia Maria to do these accelerated works in Michiquillay?

Well, I think, that our base case, Carlos is that we will receive the construction permit before the end of the environmental impact study period. We think that we have made all the work proper to receive this. Legally speaking, our position is very strong, I should say, in that regard. But this year’s budget for Tia Maria is $300 million. We expect to spend this money in the project. And we will not consider any other options until we have the – something to analyze. I usually don’t like to speculate on what if, because we are very confident that we will get the permit on this case.

Thank you very much.

Thank you. And our next question comes from the line of Thiago Lofiego from Bradesco BBI. You may begin.

Thank you, gentlemen. I have two questions. The first one, Raul, if you could give us some color on your Islo smelting capacity expansion, when are you planning to approve it? And what could be the total capacity and CapEx? And the second one…

Which one?

Just if you could – the smelting capacity at Islo – I mentioned Islo, but I’m not – Islo, right?

Okay. Yes, yes. I got it.

Yes. And the revised cash cost guidance for 2019, 2020 and 2021, if you could give it, looking forward on that as well? Thank you.

Sure. Well, we have been looking into different scenarios for having new smelting operations, but no decision has been made for the board. So I can’t comment on the details of that at this point, Thiago. On the cash cost guidance, as I said, they were expecting $0.80 per pound for 2019, this year. Should remain at that level until 2022, where given the initiation of the projects that we mentioned, the Buenavista zinc operation as well as the Tia Maria project, we should have a drop in cash cost of approximately another $0.10 down to $0.70 per pound, obviously, at these current pricing scenario. So I guess that I covered your concern.

Yes. Raul just back on the smelting question. Do you have any timing for the announcement at least? I mean, is it going to happen in the first half of this year, second half or maybe next year? Just want to understand what the time line can be?

We think that we could do an announcement through this year. But we’re still working on – looking at the different options. And in that regard, we believe that we still have some work to do.

Okay. Great. Thank you.

And our next question comes from the line of Andreas Bokkenheuser from UBS. You may begin.

Yes, thank you very much. Just two questions from me. One follow-up on Tia Maria. Let’s assume worst-case scenario, we get to August and the environmental license effectively lapses and gets canceled, would you effectively go ahead and apply for a new one, or would you reevaluate the entire project based on that potentially happening? That’s the first question. And second question, what have been your most recent conversations with the Mexican government, obviously, there have been different headlines out in the recent months to – pertaining to royalty changes, pertaining to concession lines containing to a bunch of things. I think you were earlier saying that you had a construction conversation or a construction dialogue with the Mexican government, but any updates there what you have been talking to them over the last couple of months? Thank you very much. Those are my two questions.

Okay, Andreas. Thank you very much for your questions. Well, on the – we don’t want to get into the scenario where that is outside our base case. Our base case is that Tia Maria, and all the projects in Peru will move on, with Tia Maria being the leader of the new growth for Southern Copper in Peru. We have as you – has been mentioned Tia Maria, which is 120,000 tons of new production. We have Michiquillay, 225,000 tons of new production for Peru as well, and we have Los Chancas with 120,000 tons of new production as well. So we believe that this project should move on in the next few years and that’s our base case. We don’t want to speculate on what if, because given the current outlook that we have, and the way that we see our talks with the government officials as well as the regional authorities, we believe that the project should go on, Tia Maria. Regarding the conversations with the Mexican government, again, we don’t think that this is – that it is a good idea to comment on rumors or certain talks at the media level. We want to analyze concrete government resolutions, if any. So far there are no specific legal initiatives that has been approved. And so we believe that whenever there is something specific, we will comment on that. At this point, we have no indication that a significant change will effect, legally speaking, our operations in Mexico.

That’s noted. Thank you very much.

Thank you. And our next question comes from the line of Timna Tanners from Bank of America. You may begin.

Yes, hello. Good morning. I wanted to ask a little bit more detail on the rains and our sympathies with the disappearance of your employee. If you were to summarize the impact that you would expect at this point on Q1, you’re not changing your volume guidance, so this probably could just be a more of a cost issue in near term? And then secondly, on the reduced cost that you anticipate for next year – for this year, I should say, what’s the cadence of that? Is that just really as production ramps up, we see the costs per pound slip, is that how we should think about it?

Yes. Let me start with your first question on the heavy rains, or rainfall that we have. We’re currently assessing the cost of this situation for the company. Usually, when this kind of situations arise, and now it’s raining, it may have been – miraculously that has happened a few years back in 2007, but we have a contingency emergency plan that it’s – it initiates activities at the minute that we realizes we’re in a difficult situation as has been the case. As part of that, we consider the creation of certain accountants – accounts for register all the expenses. But currently, we’re evaluating the total damage. As I mentioned, well, we do have some production losses due to stopping our facilities. Even though, the mines and the concentrators were not significantly affected by the heavy rain. We stopped them for safety reasons mainly. And that’s why we can come back in operating them as quick as we can, and with no significant difficulties. We will assess also the impact in total production or by the event. And we’ll – that’s basically it. Now focusing on your comment on cost improvement through the year. Well, through the first quarter, we will be ramping up the Toquepala new concentrator. As I mentioned, we expect it to be at full speed and capacity by the second quarter of this year. That will certainly – these new units of copper will come in – with at a very low cost, very low operating cost. In the – at the end of this quarter, we will be ramping up the molybdenum plant, the new molybdenum plant in Toquepala, which will add to our byproduct rate base a new production of molybdenum. So in quarters, I would say, in quarters one and two, you…

Okay. That’s super helpful. Just to clarify on the commentary on the heavy rains, it’s not – is the fact that you haven’t changed any guidance for production or cost, doesn’t necessarily mean that they won’t change, or just you’re still assessing? Or do you think that this one that being small in the scheme of the full year guidance?

We’re still assessing. We are at the beginning of the year, so I’m sure that our operational team will focus on capturing or trying to catch up on the production profile vis-a-vis our plans. So our view is that we should try to maintain our production guidance, as I said.

Okay. Thank you.

You’re welcome.

And our next question comes from the line of Alfonso Salazar from Scotiabank. You may begin.

Thank you. Good morning, Raul. The question is regarding your investment program in Peru and Mexico. I think it could be very useful if you can tell us when do you foresee operations to start in each of the new mines that you have in your pipeline to reach the 1.5 million tons by 2025, so that if you can relate the production estimate for each year, and which mines will be starting that year? And the second question is regarding, whether you see any positive impact from the free zone that is being created in Mexico’s northern border that could be affecting, I believe, the operations at Buenavista. So if that is something that you think is going to be of any positive impact from that? And also what is the FX that you’re assuming for this year in Mexico and in Peru? Thank you.

Okay. Thank you for your questions, Alfonso. Okay. Let me – well, the first one which is a little bit more complicated, and the usual one, I’m going to answer them right now. For this year, as I said, we’re expecting to produce 986,000 tons of copper and 700. For 2020 and 2021, it’s going to be relatively flat, slightly improving to almost close to 1 million tons in this 2020 and 2021. In 2022, we will have the beginning of the Buenavista zinc operation that will improve our zinc profile, doubling our production or adding 100,000 tons of new zinc production in 2022. And that will reflect also at the beginning of new production at the copper for – copper production for Buenavista, I’m sorry, yes, Buenavista zinc. We will have the Tia Maria’s production that year, with 120,000 tons. That will be flat through 2025 at that level, 120,000 tons. And we will have the beginning of two projects in Peru; Los Chancas, we’re expecting it to initiate production in 2025 with 150,000 tons; Michiquillay, 238,000 tons. And by next year, by 2026, we are considering the beginning of El Arco. In 2025, El Arco should add a small amount of production. So basically, what we are considering in our case for going up to 1.5 million tons, it’s the initiation of Tia Maria, Michiquillay, and Los Chancas in Peru, and El Arco, well, will contribute with some production in 2025 and full speed in 2026. Okay. On the border new legislation, we’re still evaluating the possibility that this new legislation provides. And we have – we haven’t finished it. So even though we see some positive points in it, at the same time, there are certain other considerations that we’re looking into. And so we don’t have a definite answer on that. We’re still evaluating it. And for exchange, basically, we’re assuming the current exchange rate for the Mexican operations and for the Peruvian, once the Peruvian sol at about $3.40 for the year.

Okay. Thank you very much, Raul.

I’m sorry, it’s $3.30 – on the Peruvian sol it’s $3.30, Alfonso.

And our next question comes from the line of Petr Grishchenko from Barclays. You may begin.

Hi. Thanks a lot for taking my questions. This is Petr Grishchenko with Barclays. I wanted to follow up on your cost guidance. You suggested $0.80 per pound for this year, and you also said something like once Tia Maria is on line, your costs drops to $0.70. Is that accurate or I got it wrong?

No, that’s accurate. That’s correct. We’re expecting that in – let me elaborate on that, Petr. For 2022, we’re expecting 120,000 tons for Tia Maria, that should reduce our cash cost before credits and giving us a drop in cash cost. I forgot to mention also that on the by-products, we will have the Buenavista zinc concentrator at full speed in that year as well.

Right. And what’s the – what’s your view on the cost for Tia Maria then? And if then along, given $0.70 of your consolidated guidance?

Certainly. Well, Tia Maria, it’s a deposit where we don’t have any by-products, it’s just refined copper, very high-quality copper that we’ll receive a premium on top of the copper market price for the quality of the material that we will be getting out of the SX-EW plants. Now though by products, a very competitive cash cost. In average, it should be about $1 in the life of the product, but in the first years, it will be slightly lower than that at about $0.90 per pound.

Got it. And maybe – and the second question, you did say, you cannot comment on the media reports. Well, we heard from the mining kind of related to potential changes in the mining court and tax regimes. But may be broadly, can you tell us if you were in any discussions with the government? And basically, do you think there’s any substance due to those reports, so just seeing potential higher taxes and environmental regulation in Mexico?

Let me ask Jorge Lazalde to answer your question, please. Jorge?

Hi, this is Jorge Lazalde, again. So for the – we have been in contact with several officers from the government. And what we have heard so far is that they are not expecting any major change or anything at least for now in the short future about any economic reform that will have an impact in our operations. However, many things are said within the public opinion at the media, but we have a very close relationship with the key officers from the government. And well, as far as we can tell for official purposes is that we do not expect any major change in the short-term.

Thank you. And our next question comes from the line of Marcos Assumpcao from Itau. You may begin.

Hi. Good morning, everyone. Thank you for taking the question. Regarding buyback, we just saw Grupo Mexico announcing the buyback program. And we remember that a couple of years ago Southern Copper also intimated an aggressive buyback plan when the stock was closed to today’s levels. So the question is, if you would consider doing a buyback at this point? We know that the liquidity today is also an issue, but if you consider doing that going forward? And the second question is on the copper market. We have seen prices remain close or below $2.80 per pound. If you could comment your views for prices in the short term, and also if you have changed your mind regarding long-term prices? Thank you.

Okay. Thank you very much for your questions, Marcos. Well, buyback, the answer is simple, it has not been considered so far. No specific plans on that matter, for Southern Copper, you mentioned that Grupo has made some announcements on that. On the copper market, well, we were expecting prices to head over $3 per pound last year, considering the pricing scenarios we had at the beginning of 2018, but then the concerns about mainly the commercial talks between the U.S. and China, being China a significant copper consumer created some stability in the copper market and prices decreased as we have reported through 2018 and this call. But for this year, well, we’re expecting the market to hit towards deficit. We think that refined copper, which is our main copper product, over 80% of our sales of copper are in the form of copper – refined copper of further process. So for that market, what we’re seeing is some tightness is reflected in the drop that I reported of 41% in current inventories from it’s peak in March of last year. And that we believe it should bring some upward pressure to prices. Obviously, if this current environment for the negotiations between U.S. and China deteriorates that will affect the prices, but so far, our base case is that we’re headed into a war where growth will be lower than what we have in 2018, but positive, no recession, as I said, as a base case. And in that regard, we believe that copper prices will build positively through this year.

Well, any changes on your long-term views in prices. You said that price have changed, do you see anything – have you changed your mind on that?

No, no, actually. No, we think that the incentive prices are in the range of $3.25 to $3.50, but has to be a consistent price. So even though we may see prices getting close to say $3.25, it can be just a month, it has to be something that the outlook looks good for all producers. That will certainly move on – make the board’s to move on with the – to approving projects on the copper – for copper – new copper production. But so far, at this price level, we’re not seeing much news in that regard.

All right. Thank you very much.

You’re welcome.

And our next question comes from the line of Carlos De Alba from Morgan Stanley. You may begin.

Thank you. Just a follow-up, Raul. What is – what was the provision of pricing impact in the fourth quarter, if you have a number or a ballpark figure?

I do, I do. Hold on a second. We have a provision of $28 million for open market – open sales in the sense of not having a refined or a definitive price. That was about $28 million.

Sorry, the $28 million was open sales at the end of the fourth quarter?

Yes. That’s correct.

And what was that amount at the end of the third quarter?

About $9 million. So you have $19 million of net variance in open sales.

Okay. Thank you very much.

You’re welcome.

And our next question comes from the line of Alex Hacking from Citi. You may begin.

Hi, Raul. Just one follow-up. How much copper did Buenavista mine produced in 2018? And if you could break that out between the concentrator and the SX-EW? And then what is – how does that compare to theoretical capacity of the operation, because I remember that, the SX-EW had a few issues with ramping to full capacity, I just wanted to remember exactly where we’re at there in terms of progressing towards that capacity? Thank you.

Yes, it will take me a little bit to find the numbers, hold on a sec, please. Okay, okay. For the concentrator production in Buenavista, we have in total 324,000 tons of copper produced. Being the leader, the new concentrator, which is actually operating at a very – a very good capacity level, almost 100%, and sometimes slightly higher than its freight capacity. The new SX-EW plant provided 89,200 tons of copper last year. Important thing is that the production was increasing through the different quarters, if we see what we’ll produce in the fourth quarter of last year was 19% higher than the prior quarter, so the third quarter for the SX-EW facility. On that base we have made of work is that we’ll increase our SX-EW production for Buenavista in this year, and that’s why we’re adding a little bit more than 100,000 tons of production for 2019.

Okay. So in total Buenavista produced about 415,000 tons last year. Is that correct? And then…

Yes, that’s correct, that’s correct.

Okay. And then capacity – and total capacity is going to be how much higher than that, maybe 15,000, 20,000 higher. Is that fair?

For this year, we’re expecting to produce almost 430,000 tons in Buenavista, most of that will come from SX-EW recovery.

Okay. And then that would be close to the full capacity of the mine, like 430,000 tons?

Well, we could go a little bit more further on that. But we’re very close to full capacity for the concentrator’s are at full speed. The SX-EW have some room to improve, and we’re working very hard to move on, on that direction.

Okay. That’s perfect. Thank you for the clarification.

You’re welcome.

Thank you. And our next question comes from the line of Caio Ribeiro from Credit Suisse. You may begin.

Yes. Good afternoon, everyone. I just have one question. I wanted to see if you could give us a general overview of what licenses are still pending for Los Chancas, El Arco and Michiquillay? And what your timing is right now on obtaining these licenses to move ahead with these projects? Thank you.

You’re welcome. Los Chancas, well, in the case of Los Chancas, we finished the feasibility study last year. We are currently working on the Environmental Impact Assessment. And that is a process that may take about a year to be completed or slightly more than that. In the case of Michiquillay, we’re working with the Peruvian authorities to – well, the first thing was that we received the asset last year at the beginning of the second half of the year. We have been working with the local communities. Very recently, we initiated – we’re initiating the project work on the technical side as well as the social side with the local communities of Michiquillay. For this, we have a time span of five years at this point. We will love to reduce that current time span, but that’s what we have as a base case at this point.

Okay. Perfect. Thank you.

You’re welcome.

[Operator Instructions] Our next question comes from the line of Hernan Kisluk from MetLife. You may begin.

Hello. Thank you for taking my question. It’s regarding the guidance for CapEx for the next two years, if you could provide an update on that?

Certainly. For this year, we’re expecting to spend $1.8 billion in CapEx. For next year, $1 billion. That should add up to $2.9 billion by 2021. $2.5 billion in 2022, that will be pretty much flat up to 2024, where we have $2.8 billion. As I mentioned, the projects will kick in, in 2022, Tia Maria. And then, well, at El Arco, as had mentioned before, that we will initiate operations in 2023, and we have the new zinc concentrator by 2022. So the outlook for CapEx includes investments in El Arco, Michiquillay, Los Chancas and some other minor investments are considered as well.

Thank you very much.

You’re welcome.

And I’m showing no further questions at this time. I’d like to turn the call back to Raul for closing remarks, please.

Well, thank you very much. With this, we conclude our conference call for the fourth quarter and the full year 2018 results. We certainly appreciate your participation and hope to have you back with us when we report the first quarter of 2019. Thank you very much, and have a very good day.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.