Southern Copper : 17.05.16 Southern Copper Corporation 1Q16 Earnings Results Conference Call Transcript

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SCCO - Q1 2016 Southern Copper Corp Earnings Call

EVENT DATE/TIME: MAY 02, 2016 / 03:30PM GMT

CORPORATE PAR T ICIPANTS Raul Jacob Southern Copper Corporation - VP of Finance and CFO Oscar Gonzalez Rocha Southern Copper Corporation - CEO CONFER EN CE CA LL PARTIC IPAN TS Karel Luketic BofA Merrill Lynch - Analyst Carlos de Alba Morgan Stanley - Analyst Matthew Korn Barclays Capital - Analyst Marco Assumpcao Itau BBA - Analyst Alfonso Salazar Scotiabank - Analyst Guillermo Estrada GBM - Analyst Ricardo Miranda LarrainVial - Analyst Tony Rizzuto Cowen and Company - Analyst PRE SEN TA TION Operator

Good morning and welcome to Southern Copper Corporation's first-quarter 2016 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 first-quarter 2016, 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 US GAAP.

Now I will pass the call to Mr. Raul Jacob. You may begin.

Raul Jacob - Southern Copper Corporation - VP of Finance and CFO

Thank you very much, Richard.

Good morning to everyone and welcome to Southern Copper Corporation's first-quarter 2016 earnings conference call. Participating with me in today's conference are Mr. Oscar Gonzalez Rocha, Southern Copper's CEO, and Mr. Daniel Muñiz, Executive Vice President of Southern Copper.

In today's call we will begin with an update on our view of the corporate market. We will then review 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.

Now let me focus on the copper market, which is the core of our business. During the past quarter we have seen some easing in the macroeconomic headwinds that have affected our market over the last four years. In particular, we want to emphasize the slight recovery of commodity prices as a result of the US dollar depreciation.

Also, the Chinese economy's corporate consumption has a more positive outlook now, improving the sentiment regarding the copper market balance. As you know, China is the world's major copper consumer with about 46% of world consumption. We believe that China's demand for copper is having reasonable support from the partial recovery of the housing market and the national grid investment program.

Looking at the supply side, production cut announcements are currently over 800,000 tons. As these cuts materialize, they will offset the additional production coming from new operations such as Las Bambas and Toromocho, or expansions including Cerro Verde and our own Buenavista project.

In addition to these production cuts, we believe that supply will be affected in the coming quarters from delays in project startups, technical problems, labor unrest, excess government taxation, and other difficulties that have been common to our industry in the last few years. Even though the current world's economic outlook for growth has been adjusted slightly downward, we believe corporate demand is consistently improving and there are no new project approvals. As a result, we anticipate market tightness for the future, giving us an optimistic view about long-term copper prices.

Let me now focus on Southern Copper production for the past quarter. Copper mine production increased by 24.8% in the first quarter of this year. That is, 221,661 tons, a new Company record. Last year we had 177,616 tons in the first quarter of the year. This was mainly the result of higher production at our Buenavista mine, which increased its production by 43,898 tons, or 67.6%. The remaining difference includes positive variances at La Caridad and Cuajone that were partially offset by a reduction at the Toquepala operation.

Regarding molybdenum, it represented 4.4% of the Company sales in the first quarter of 2016. Molybdenum production decreased by 4.9% to 5,571 tons in the first quarter of this year from 5,856 tons in the first quarter of 2015, principally due to lower production at the Toquepala mine. This was the result of lower grades and recovery. The reduction at Toquepala was 18.6%; but all other molybdenum operations within the company increased their volumes, partially offsetting Toquepala's lower volume.

Silver represented 4.9% of our sales in the first quarter of 2016 and it is currently our first by-product. Mine silver production increased by 25.7% in the first quarter of this year when compared to the same period of 2015. This was mainly the result of higher production at our Buenavista operation that increased 125% its silver production, and the IMMSA operations that increased their silver production by 16%.

Zinc represented 3.7% of our sales in the first quarter. Mined zinc production was 18,028 tons in the first quarter, 18.6% higher than the first quarter of 2015 production, as we solved all the problems that we had at the Charcas and Santa Eulalia mines in the last year.

Looking at our financial results, for the first quarter of 2016 we had sales for $1.3 billion that were $29.7 million lower than sales for the first quarter of 2015. That is, 2.3% less. We had a significant copper sales volume increase of 26.2% that was partially offset by lower copper prices of 19.7%; yielding a net increase in sales value of about 1.7% for copper.

Regarding by-products, higher sales of silver of 9.3% due to higher volume of 25% was partially offset by lower prices that decreased 11% in the past quarter. We had lower sales for molybdenum of 38.8%, due to lower volume, minus 4%, and price as the main reason: 37.3% lower. Lower zinc sales of 22.2% were due to lower volume, minus 5.4% and prices, minus 19.1%.

Even though our copper sales volume increased by 26.2%, our total operating cost and expenses increased only by 7.3%, or $61 million when compared to the first quarter of 2015. Main cost increments were in purchased copper, depreciation, repair materials, reagents, and sales expenses. These cost increments were partially offset by lower inventory consumption, diesel and fuel costs, environmental remediation, labor and workers' participation, and other cost reductions.

Let me mention that our total operating cost and expenses decreased by $168 million, or 15.8% when we compare it to the last quarter of 2015. As we indicated when reporting the fourth quarter of 2015, we had a non-recurring increase in operating cost in the fourth quarter of last year due to cost of copper from third parties and some Buenavista-related ramping up costs. Finally, some year-end adjustments increased the costs in the fourth quarter. That was a unique event that we don't expect to happen again.

Looking at our EBITDA; EBITDA for the first quarter of 2016 was $481 million. That is a 38.6% margin compared with $556.1 million, or a 43.6% margin for the first quarter of 2016.

Our operating cash cost per pound of copper, before by-product credits, was $1.41 per pound in the first quarter of 2016 compared with $1.74 per pound in the fourth quarter of last year. This is a $0.33 decrease. This 19% decrease in operating cash cost is a result of lower unit costs from our production, lower unit treatment and refining charges, and administrative expenses.

Southern Copper's operating cash costs, including the benefit of by-product credits, was $0.98 per pound in the first quarter of 2016. This cash cost was $0.30 lower than the cash cost of $1.28 for the fourth quarter of 2015. That is a 23.5% reduction.

Regarding by-products, we had a total credit of $203 million, or $0.425 per pound in the first quarter of this year. This figure is compared with the credit of $196 million, or $0.453 per pound in the fourth quarter of 2015. Total credits have increased for molybdenum and zinc, and decreased for gold, sulfuric acid, and silver.

Net income attributable to SCC shareholders in the first quarter of 2016 was $185.1 million, that is 14.9% of net sales, or diluted earnings of $0.24 per share.

Looking at our expansion and capital projects, capital investments were $223.3 million for the first quarter of 2016; that is 10.2% lower than the first quarter of 2015 and represented 120.6% of net income. In 2016 we continue the development of our investment program to increase corporate production capacity by 90% from our 2013 production level of 617,000 tons to 1.2 million tons.

Focusing on our Mexican projects, of the $3.5 billion of the Buenavista project program, the Company has already invested $3 billion. Excluding the Quebalix project and some infrastructure facilities, all the other facilities of this program are currently operating, and we are expecting to increase production by 200,000 tons to produce 460,000 tons of copper in 2016 and 500,000 tons of copper in 2017 at the Buenavista operation.

We also expect to increase our molybdenum production in Buenavista by 42% to roughly 4,900 tons per year. The Buenavista program is being completed under budget.

Regarding the mine equipment, 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 of these assets are currently in operation.

The new copper and molybdenum concentrator 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 completing its ramping-up phase with its six mills already in operation. In September of 2015, we obtained the first copper concentrate lot, and the plant is now running at 93% of capacity. Due to the promising initial results, it is expected to gradually increase production until the plant reaches full capacity by this quarter. The project has a 99% progress.

The crushing, conveying and spreading system for leachable ore, what we call the Quebalix IV project, is a project that has the main objective of reducing processing time, as well as mining and hauling cost. It will also increase production by improving SX-EW copper recovery with a crushing and conveying capacity of 80 million tons per year . It is expected to be completed by the second quarter of this year, 2016.

As of March of 2016, the project has a 94% progress with an investment of $226 million out of the approved capital budget of $340 million. The remaining projects to complete the $3.5 billion budget program, include important investments in infrastructure, power lines and substations, water supply, tailings dam, mine equipment shops and internal roads.

Looking at the Peruvian projects, we have the Toquepala expansion project which is in the Tacna region, in Peru. This project includes a new state-of-the-art concentrator, which will increase annual production capacity by 100,000 tons of copper to 230,000 tons of copper production by 2018. And will also increase molybdenum production by 3,100 tons at an estimated capital cost of $1.2 billion. Through March of this year we have invested $405.7 million in the project. The project is expected to be completed by the first quarter of 2018.

The Toquepala high-pressure grinding rolls, or HPGR system has the main objective to insure that the current concentrator in Toquepala will operate at its maximum capacity of 60,000 tons per day, even with an increase of the ore material hardness index. Additionally, recoveries will be improved with a better ore crushing. The budget for this project is $40 million and we have invested $7.1 million as of March 31 of this year. The project is expected to be completed by the fourth quarter of 2017.

The Cuajone Heavy Mineral Management Optimizing Project in the Moquegua region, in Peru. This is a project that consists of installing a primary crusher at the Cuajone mine pit with a conveyor system for moving the ore to the concentrator. The project aims to optimize the hauling process by replacing rail haulage, thereby reducing operating and maintenance costs, as well as the environmental impact of the Cuajone mine.

The crusher will have a processing capacity of 43.8 million tons per year. The main components, including the crusher and the overland belt, has been acquired, and we have started preparation of the land and civil works. As of March of this year, we have invested $85 million in this project out of the approved capital budget of $165.5 million. The project is expected to be completed by the first quarter of next year.

Regarding dividends, as you know, it is the Company policy to review at each Board meeting cash resources, expected cash flow generation from operations, capital investment plan, and other financial needs in order to determine the appropriate quarterly dividend. Accordingly, as disclosed to the market on April 21, the Board of Directors authorized a cash dividend of $0.05 per share of common stock, payable on May 24 to shareholders of record at the close of business on May 10 of this year.

With this in mind, ladies and gentlemen, thank you very much for joining us, and we would like to open up the forum for questions.

QUESTION AND A N SWER