Southern Copper : 26.07.16 Southern Copper Corporation 2Q16 Earnings Results Conference Call Transcript

Good morning and welcome to Southern Copper Corporation's second-quarter and six months 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 second-quarter and six months 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.

Thank you very much, Richard. Good morning to everyone and welcome to Southern Copper Corporation's Second Quarter 2016 Earnings Conference Call. Participating with me in today's conference are Mr. Oscar Gonzalez Rocha, Southern Copper's CEO and Board member, and Mr. Daniel Muñiz, Executive Vice President of Southern Copper and also Board member.

In today's call, we will begin with an update on our view of the copper 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, the core of our business. During the past quarter, regarding copper, we have seen some improvement in its prices, mainly attributable to a recovery of consumption in China and some demand from North America.

We see the refined copper market, where we do most of our business, in relative balance due to the following. Demand is growing at about 2.5% worldwide, this alone will absorb approximately 500,000 tons of copper. Additional production will be significantly offset by production cuts, lower production due to operation closures and cuts are currently estimated at approximately 850,000 tons.

In addition to these production cuts, we believe that expected supply will be reduced in the coming quarters from delays in project startups, technical problems, labor unrest, excess government taxation, and other difficulties. We think that all of these elements will significantly offset new production coming to the market as a result of past investments.

Let me focus now on Southern Copper's production for the past quarter. Copper mine production increased by 26.1% in the second quarter of this year to 225,842 tons from 179,085 tons in the second quarter of last year. This is the result of a 78% increase in production at the Buenavista mine in Sonora, Mexico. This operation increased production by 49,362 tons. With this quarter's production, we reached a new Company record of 447,503 tons for the first half of this year.

The remaining production changes include positive variances at La Caridad that were partially offset by a reduction at the Cuajone and Toquepala operations. At this point, we're increasing our guidance for the year, expecting copper production of 913,500 tons for 2016, an increase of 170,500 tons when compared to last year's production and a new Company record for Southern Copper.

Molybdenum represented 6.1% of the Company sales in the second quarter of this year and is currently our first by-product. Molybdenum production decreased by 7.9% to 5,305 tons in the second quarter of 2016 from 5,759 tons in the second quarter of last year. This was principally due to lower production at the Peruvian operations as a result of lower ore grades and recoveries. The Mexican molybdenum operations increased their volumes, partially offsetting the lower volume from the Peruvian mines. For 2016, we expect to produce 22,800 tons of molybdenum.

Silver represented 5.2% of our sales in the second quarter of 2016. Mined silver production increased by 27.5% in the second quarter, when compared to the same period of 2015. This was mainly as a result of higher production at our Buenavista mine that increased its production by almost 160% and the IMMSA mine that increased its silver production by 25%.

Regarding zinc, it represented 4.3% of our sales in the second quarter of this year. Mined zinc production was 19,994 tons in the second quarter of 2016, 43% higher than the same period of 2015. This was due to the solution of last year's problems at the Charcas and Santa Eulalia mines.

Looking at our financial results for the second quarter of 2016, sales were $1.3 billion, $47.9 million lower than sales of the second quarter of last year or 3.5% less. Copper sales volume increased by 19.2% in this quarter, but value decreased by 8.1% in a scenario of lower prices.

Regarding by-products, when compared to the second quarter of last year, we had higher sales of molybdenum by 28%, due to significant negative price adjustment that affected moly sales in 2015, not this quarter; this quarter we have a normal quarter regarding moly sales. In 2016 silver sales -- in the second quarter, silver sales increased by 28.7% due to higher volume, 25.8% increase in volume of sales of silver and prices that increased slightly by about 3%. Zinc sales decreased by 2.6% due to lower price that decreased by 13% that were partially offset by higher volume of 15.3% in zinc sales.

Regarding operating cost, as we mentioned before, our copper production increased by 26%, when compared to the second quarter of 2015. However, our total operating costs and expenses increased only by 8% or $70.2 million, when compared to the second quarter of last year. So we increased production by 26% and our cost increased only by 8%.

The main cost increments have been in depreciation, leachable material, repair materials, energy, sales expenses and other expenses. These cost increases or increments were partially compensated by lower purchased copper, diesel and fuel costs and other materials. EBITDA for 2016 was $555.4 million, that is a 41.6% margin compared with $637.4 million or a 46.1% margin for the second quarter of 2015.

Cash cost. Operating cash cost per pound of copper before by-product credits was $1.41 per pound in the second quarter of 2016. The same as in the first quarter of this year. The main variances within the cost were in higher treatment and refining charges, resulting from the Buenavista concentrate copper sales and lower premiums that were offset by lower administrative expenses, which decreased by 12.7%, and lower leachable material that decreased by 37%.

Southern Copper operating cash cost including the benefit of by-product credits was $0.907 per pound in the second quarter of this year. This cash cost was $0.074 lower than the cash cost of $0.981 that we had in the first quarter of this year, that is at 7.5% lower cash cost. Regarding by-products, we had a total credit of $249 million or

$0.507 per pound in the second quarter. These amounts compared with the credit of $203 million or $0.425 per pound in the first quarter of 2016. Total credits have increased for all by-products. For molybdenum 47.1%, for zinc 23.2%, for silver 19.1%, etcetera.

Net income attributable to SCC shareholders in the second quarter was $221.9 million that is 16.6% of sales or diluted earnings per share of $0.29. Capital investments were $564.9 million for the first half of this year that is 6.6% higher than the first half of 2015. This represented 138.8% of net income.

In 2016, we continue with the development of our investment program to increase copper production capacity by 90% from our 2013 production level of 617,000 tons to

1.2 million tons. Regarding our Mexican projects, the Buenavista project in the Sonora state that has a budget of $3.5 billion in which the Company has already invested

$3.2 billion.

Excluding the almost completed Quebalix IV 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 in 2017. We also expect to increase our Buenavista molybdenum production to a capacity of 4,600 tons per year. The Buenavista program is being finished on time and under budget.

The new copper-molybdenum concentrator, this facility 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 has completed its ramping-up phase with its six mills already in operation. In September of last year, we obtained the first copper concentrate lot and the plant is now running at 105% of its design capacity.

The Quebalix IV, which is a facility for crushing, conveying and spreading of leachable ore, it's a project that has a main objective to reduce the processing time as well as mining and hauling cost for leachable material. This facility will also increase production by improving the SX-EW copper recovery. It has a crushing and conveying capacity of 80 million tons per year, and is expected to be completed in the third quarter of 2016.

As of June of this year, the project has 98% progress, almost finished, with an investment of $248.4 million out of the approved budget of $340 million. The remaining projects to complete the $3.5 billion budget program includes investment in infrastructure which are power lines and substations, water supply, tailings dam, mine equipment shops, internal roads, etcetera.

Focusing on the Peruvian projects.

The Toquepala expansion project which is in the Tacna region in Peru. This is a project that includes a new state-of-the-art concentrator, which will increase annual production capacity by 100,000 tons of copper to 235,000 tons in 2018. It will also increase molybdenum production by 3,100 tons at an estimated capital cost of $1.2 billion for the whole facility. Through June 30, 2016 we have invested $431.1 million in the project. The project is expected to be completed by the second quarter of 2018.

The Toquepala high-pressure grinding roll system is a project that has a main objective to ensure that our existing concentrator will operate at its maximum milling capacity of 60,000 tons per day, even with the expected increase of the ore material hardness index. Additionally, recoveries will be improved and production enhanced with a better ore crushing. The budget for this project is $40 million and we have invested $11.7 million as of June of this year. It is expected to be completed in the fourth quarter of 2017.

The Cuajone's heavy mineral management optimizing project which is in the Moquegua region of 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 excavations and civil work. As of June of this year, we have invested $102.2 million in this project out of the approved capital budget of $165.5 million. The project is expected to be completed by the second quarter of next year.

Dividend announcement. 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 July 21, the Board of Directors authorized a cash dividend of $0.05 per share of common stock, payable on August 25 to shareholders of record at the close of business on August 11 of this year.