SOUTHERN COPPER CO. THOMSON REUTERS STREETEVENTS
EDITED TRANSCRIPTSCCO - Q3 2015 Southern Copper Corp Earnings Call
EVENT DATE/TIME: OCTOBER 28, 2015 / 05:00PM GMT
Good morning, and welcome to Southern Copper Corporation's third quarter and 9 months 2015 results conference call. With us this morning we have Southern Copper Corporation -- Mr. Raul Jacob, Vice President Finance and CFO, who will discuss the results of the Company for the third quarter and 9 months 2015, as well as answer any questions that you might have.
The information discussed on today's calls may include forward-looking statements regarding the Company's results and prospects, which are subject to risk 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 statements, whether as a result of new information, future events, or otherwise.
All results are expressed in full US GAAP.
Now, I will pass the call on to your host, Mr. Raul Jacob. Mr. Jacob, you may begin.
Thank you very much, Bianca, and good morning to everyone, and welcome to Southern Copper's third quarter 2015 earnings conference call. Participating with me in today's conference call is Mr. Daniel Muñiz, Southern Copper's Board Member.
In today's call we will begin with an update on our view of the copper market. We will then talk about Southern Copper's key results related to production, sales, operating cost, financial results, expansion projects, and capital expenditure program. After that, we will open the session for questions.
Before we go ahead with our view of the market, let me emphasize that Southern Copper is very well-positioned to take advantage of the current market conditions. As I will report, the Company has increased its copper sales by 11% year-to-date, adding very low-cost copper pounds to its total cash cost. On top of this, we have a strong balance sheet and a relaxed debt payment schedule, with no principal payments due until 2020.
So, during this low-price environment, we're making our Company much more cost-competitive while maintaining a very solid financial condition. Having said this, let me focus on the copper market, the core of our business. We maintain our long-term confidence in the positive fundamentals of the copper market.
During this year, demand has been affected by macroeconomic headwinds and concerns about the Chinese economy's copper consumption. As you know, China is the world major copper consumer, with about 46% of world consumption estimated for 2015.
We believe China's demand for copper will increase 3% this year. For 2016, we think it will increase its growth mark to about 4%, driven by the recovery of the Chinese housing market and the national grid investment program. Let me mention that 4% of additional copper demand from China is approximately 400,000 tons of additional demand.
On the longer-term view, let me emphasize that China is an emerging market, and as such, their middle classes are hungry for housing, cars, appliances, etcetera. So, we believe we will see in the future a strong copper market coming from this country, as it will evolve towards a consumption-driven economy.
Regarding the developed economies -- that is, the US, Europe and Japan -- with about 30% of worldwide refined copper demand, growth has been on track through 2015 at about 2% in average. In summary, regarding demand, even though we're facing at present some macroeconomic headwinds, we're very optimistic about the future.
Looking at the supply picture, we have noted production cut announcements, for a total of 520,000 tons in the last quarter. And we should expect some more production cuts if this price environment persist.
I want to emphasize that this is a new factor that, by itself, will significantly vary the market trend towards a copper deficit.
On a more structural view, as we have expressed in the past, we believe that supply will be affected in the coming quarters from delay in project start-ups, technical problems, labor unrest, excess government taxation, and other difficulties. We also want to emphasize that copper prices at current levels are not sufficient to promote the necessary future supply growth, thereby improving the strong long-term fundamentals of our industry.
Focusing on Southern Copper's copper production in the third quarter, it increased by 9.4% to 179,892 tons from 164,468 tons in the third quarter of last year. This increase was the result of higher production at all our units, led by the Buenavista copper production increase of 20.5%.
At this point we are adjusting our production guidance. Our current estimate for 2015 copper production is 757,300 tons, which is approximately 75,000 tons higher than last year's production of 682,600 tons. As previously reported, with this production increase we will set a new production record for Southern Copper.
Looking at molybdenum production, it represented -- molybdenum represented 3.4% of our sales in the third quarter of 2015. The molybdenum production decreased by 4.7% to 5,739 tons in the third quarter of 2015, from 6,024 tons in the third quarter of last year, mainly due to lower production at our Buenavista molybdenum plant as a result of lower water availability. This difficulty has been solved. This negative result was partially offset by higher production at the Peruvian operations due to higher grades.
For 2015, we expect to produce 23,100 tons of molybdenum, increasing our initial guidance of 21,500 tons by 1,600 tons.
Silver represented 4.8% of our sales in the third quarter, and it is currently our main by-product. Mined silver production increased by 12% in the third quarter of 2015, mainly as a result of higher production at our Mexican operations.
In the case of zinc, it represented 3.9% of our sales in the third quarter of 2015. Zinc production increased by 22.4% to 16,297 tons in the third quarter of 2015, from the number at the third quarter of 2014, which was 13,318 tons.
Basically, it was the result of the higher production of our IMMSA facilities. Refined zinc production was 21,459 tons in the third quarter of this year; that is, 28.6% higher than the similar quarter of 2014.
Going into our financial results, for the third quarter of 2015 sales were $1.1 billion; that is, $341 million lower than the sales for the third quarter of 2014, a reduction of 23.1%. That was a shift, even though our volume increased for copper by 5.5%, due to the low-price scenario.
Regarding by-products, we had higher sales of zinc that increased by 6.5% due to an increase in volume of 29.2%, that compensated for lower prices of minus 20% in the case of zinc.
Molybdenum sales decreased by 67.9% due to lower prices, that decreased by 54.4%, and volume that decreased by 6.5%. In the case of silver, sales decreased by 24.9%, mainly driven by prices.
Our total operating costs and expenses decreased by $80.8 million, or 8.7%, when compared to the third quarter of 2014. The main cost reductions have been in environmental remediation (that decreased by $40.5 million); energy; workers' participation; and diesel and fuel, as well as labor.
Our EBITDA for the third quarter was $421.2 million; that is, a 37.2% margin, compared with $687.5 million, or a 46.6% margin for the third quarter of 2014.
Looking to our operating cash cost, the cash cost per pound of copper before by-product credits was $1.58 per pound in the third quarter of 2015. That compares with
$1.67 per pound in the second quarter of 2015, a 9.2 cent decrease. This decrease in operating cash cost is the result of lower cost per pound from production cost.
Southern Copper operating cash cost, including the benefit of by-product credits, was $1.07 per pound in the third quarter of 2015. This cash cost was 5.9 cents lower than the cash cost of $1.12 that we had in the second quarter of this same year.
Regarding by-products, we had a total credit of $200 million, or 51.5 cents per pound, in the third quarter of 2015. These figures compare with a credit of $211 million, or 54.7 cents per pound, in the second quarter of this year.
Total credit has increased for zinc by 13.8%; sulfuric acid, by 3.7%; and decreased for molybdenum, 39.5%; silver, 3%; and gold, 0.2%. With the exception of molybdenum, all other by-product production volumes have increased between the third quarter of this year and the second quarter of this year. Zinc increased its volume by 16.6%, gold by 12%, sulfuric acid by 7.4%, and silver by 3%.
Regarding prices, however, all by-products prices decreased, yielding a lower by-product credit to the Company.
Net income attributable to Southern Copper shareholders in the third quarter of this year was $98.4 million; that is, 8.7% of sales, or diluted earnings per share of $0.12.
This decrease was mainly due to lower metal prices, as well as to a $51.4 million deferred tax adjustment recorded in the third quarter of this year, that was related to a filing of the 2014 tax return. Excluding this one-time adjustment, net earnings would have been $149.8 million.
Expansion and capital projects. Capital investments, including the $100.4 million for El Pilar acquisition, were $946.3 million for the 9 months of 2015; that is, 14.6% lower than the same period of 2014, and represented 140.1% of our net income. We continue moving forward with our investment program to increase copper production capacity by approximately 90% from our 2013 production level of 617,000 tons to 1,165,000 tons by 2018.
For our Mexican projects, and specifically the Buenavista operation projects, we continue developing our $3.5 billion investment program at this unit, which is expected to increase its copper production by approximately 180%, as well as molybdenum production by 42%.
Regarding the mine expansion, to date we have received 61 400-ton capacity trucks, 7 shovels, and 8 drills required for the mine expansion, with an investment of $510.9 million. All these assets are currently in operation.
The new copper-molybdenum concentrator of Buenavista has an annual production capacity of 188,000 tons of copper and 2,600 tons of molybdenum. The project will also produce 2.3 million ounces of silver and 21,000 ounces of gold per year.
The new concentrator is in its ramping-up phase, and 3 out of the 6 mills are currently in operation. We're pleased to mention that the tonnage processed by the mills has exceed their design capacity. The initial results of this facility are encouraging, with better-than-expected recovery and concentrate grade.
In September we obtained the first copper concentrate lot and, due to the promising initial results, we expect to gradually increase production until the plant reaches full capacity by the first quarter of next year. The project has a 99% progress with an investment of $1.1 billion out of the approved capital budget of $1.4 billion.
The SX/EW III plant, also in Buenavista, received in July the approval for the initiation of activities in the Tinajas 2 leaching pad. This will allow the Company to achieve the designed annual production capacity of 120,000 tons of low-cost copper cathodes by the first quarter of 2016. As of September of this year, we have invested $522.4 million in this project.
The Quebalix IV, which is a facility for crushing, conveying and spreading the leachable ore of the Buenavista mine is also moving forward very nicely. This project's main objective is to reduce processing time, as well as mining and hauling costs. It will also increase production by improving SX/EW copper recovery. It has a crushing
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