Southern Copper : 02.15.19 SCC conference call 4Q18 transcript

Southern Copper Corp (4Q18 Earnings)

February 12, 2019

Corporate Speakers:

•  Raul Jacob Ruisanchez, Southern Copper Corporation, VP of Finance, Treasurer & CFO

•  Julian Jorge Lazalde Psihas, Southern Copper Corporation, Secretary

Participants:

•  Carlos De Alba, Morgan Stanley, Analyst

•  Caio B. Ribeiro, JP Morgan Chase & Co, Analyst

•  Thiago K. Lofiego, Banco Bradesco BBI S.A., Analyst

•  Andreas Bokkenheuser, UBS Investment Bank, Analyst

•  Timna Beth Tanners, BofA Merrill Lynch, Analyst

•  Alfonso Salazar, Scotiabank Global Banking and Markets, Analyst

•  Petr Grishchenko, Barclays Bank PLC, Analyst

•  Marcos Assumpcao, Itau Corretora de Valores S.A., Analyst

•  Alexander Nicholas Hacking, Citigroup Inc, Analyst

•  Hernan Kisluk, MetLife Investment Management Limited, Analyst

PRESENTATION

Operator: 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 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 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.

Raul Jacob Ruisanchez: 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 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, 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 the 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 disruptions due to labor negotiations or technical difficulties, leading to an unexpected growth in supply of approximately 2.5%, much higher than the 1.5% forecasted by analysts at the beginning of 2018.

Even though the market was in balance with these marks, there was a significant reduction of copper inventories in 2018, reflecting the refined copper scarcity. From its 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, a 41% reduction.

For 2019, our base case considers a slowdown in world's economic growth, but not a recession.

Consequently, we believe refined copper demand will grow at about 2.5% and supply at about 1.5%. Yielding a year of market deficit that will put upward pressure on copper prices.

Let me point out that a 2.5 percentage points of world demand growth are approximately 600,000 tons of new copper demand. Given the current market outlook as well as our continuous commitment to increase low cost production, we believe Southern Copper is uniquely positioned to continue delivering enhanced performance, sustainable growth and superior value.

Our best-in-class, low-cost operations coupled with a large high-quality reserve base in investment-grade jurisdictions, continues to offer highly attractive growth opportunities.

In addition, our robust capital structure provides the financial and strategic flexibility required for its execution.

For 2019, we expect to produce 986,700 tons of copper. Given the current market outlook, we are focusing on developing the next phase of our growth program, aiming toreach a milestone copper production capacity of 1.5 million tons that is a 50% increase in capacity by 2025.

With a very competitive cash cost, we expect to achieve these, while delivering enhanced performance, sustainable growth and superior value as has been and it is the case for Southern Copper.

Let us now focus on Southern Copper's production for the past quarter and year 2018.

Copper represented 79.9% of our sales in the fourth quarter of 2018. Copper production increased 4% to 234,991 tons in the fourth quarter of last year compared with the same period of 2017.

This was principally due to higher production at Toquepala mine, which increased its production by 20.8% in the last quarter as a result of additional copper production of 8,630 tons from the new concentrator at Toquepala.

Continuing with our investment program, we have completed the construction of the Toquepala expansion project in Peru, where the new concentrator has initiated operations in the fourth quarter of last year and is currently operating at 60% of capacity.

Full production is expected by the second quarter of this year.

For 2018, our total copper production increased 0.8% to 883,689 tons compared with 2017 production of 876,979 tons.

For this year, 2019, the new Toquepala concentrator will add 100,000 tons to our annual copper production capacity, allowing us to reach 986,700 tons of annual copper production.

This state-of-the-art unit will bring us to a new production record with even a lower cash cost per pound of copper.

Considering last year's average prices for our main products, for 2019, we expect our cash cost to set at $0.80 per pound, an additional reduction of 8% of last year's cash cost of $0.87, reinforcing Southern Copper's leadership as a low-cost producer.

Looking into our molybdenum production. Molybdenum, as you know, is our main by-product at this point, and it represented 7.8% of the Company's sales value in the fourth quarter of last year.

Molybdenum prices averaged $11.99 per pound in the quarter, which compares with $8.72 per pound in the fourth quarter of 2017, that is a 37.5% increase.

Molybdenum mine production increased by 7.5% in the fourth quarter of last year due to higher production at Toquepala, which increased its mark by 30.7%, resulting from betterore grade and recovery and the Buenavista operation, which improved its production by 21.3% as a result of higher production at the new concentrator.

These results were partially offset by lower production at Cuajone molybdenum plant. In 2018, we produced 21,985 tons of molybdenum, an increase of 3.1% in production compared to 2017, principally due to additional production from the Buenavista plant. In 2019, we expect to produce 25,300 tons of molybdenum, that is a 15% increase in our production, with 2,600 tons coming from the molybdenum plant at the new Toquepala concentrator.

For zinc, which represented 4.5% of our sales value in the fourth quarter of last year, we had an average price of $1.19 per pound in the quarter, a price reduction of 19% from the fourth quarter of 2017.

Zinc mine production increased by 26.8% to 17,590 tons in the fourth quarter of last year compared to a fourth quarter of 2017.

This was the result of higher production at Santa Barbara and Santa Eulalia.

In the case of the Santa Barbara mine, higher production was the result of higher milling ore grade and recoveries, while for Santa Eulalia, production increased due to higher milling and ore grades. These production increments were partially offset by lower production at Charcas due to lower recoveries.

Refined zinc production decreased by 6.1% in the fourth quarter of last year compared to the same period of 2017.

As previously reported on August of last year, the Company resumed control of the San Martin mine, located in Zacatecas, Mexico. As the San Martin facilities deteriorated during the 11 years of the illegal stoppage, we are undertaking a major renovation in order to restart operations with an estimated capital budget of $77 million.

Once in operation, we believe San Martin will have an annual production capacity of 20,000 tons of zinc, 2.8 million ounces of silver, 8,000 tons of copper and 1,000 tons of lead per year.

A labor force of approximately 600 contractors is currently working to restore this facility. When in operation, San Martin will generate new labor opportunities for approximately 3,000 direct and indirect jobs as well as revenue for federal, state and local governments.

In 2018, we produced 70,778 tons of zinc, an increase of 3.1%, mainly because of the recovery of the Santa Barbara and Santa Eulalia mines production.

For 2019, we expect to produce 96,400 tons of zinc, that is a 36% increase in zinc production, with a significant contribution of 15,900 tons from the San Martin mine.

Silver production represented 4.4% of our sales value in the fourth quarter of 2018 with an average price of $14.51 per ounce in the quarter, a 12.9% decrease when compared to the same period of 2017.

Mined silver production increased by 13.9% in the fourth quarter of last year, mainly due to a higher production at our IMMSA operations, resulting from higher grades. In the case of refined silver production, it increased by 17.6% in the fourth quarter when compared to the fourth quarter of 2017.

In 2018, we produced 17.3 million ounces of silver, an increase of 8.7% in production from 2017.

For this year, 2019, we expect to produce 21.4 million ounces of silver, an increase of 24% or 4.1 million ounces when compared to last year's production. This will mainly result from the important contribution of the San Martin mine, Santa Barbara and Toquepala.

Looking into our financial results for the fourth quarter of 2018, sales were $1.7 billion, that is $169.7 million lower than sales for the fourth quarter of 2017 or a 9.1% decrease in sales value.

Copper sales volume increased by 2.1% and value decreased by 11.7%.

This is in a scenario of lower copper prices as we reported already.

Regarding our main by-products, we had higher sales of molybdenum, which increased by 28.3% due to better prices and volume, which increased by 9.9%.

In the case of silver, we had better sales for 11.9% due to higher volume, which increased by 32.2% that was partially offset by the mentioned lower prices. In the case of zinc, we had lower sales by 31.7%, due to lower volume, which decreased by 17.4% and prices.

Our total operating cost and expenses increased by $36.9 million or 3.6% when compared to the fourth quarter of 2017.

The main cost increments have been in higher inventory consumption, sales expenses, diesel, fuel and energy, exchange rate differences, repair materials and other factors that were partially offset by lower copper concentrates purchase.

Adjusted EBITDA for the fourth quarter of 2018 was $793 million, that is a 46.8% margin compared with $999.7 million or a 53.6% margin for the fourth quarter of 2017.

Cash cost. Operating cash cost per pound of copper before by-product credits was $1.57 per pound in the fourth quarter of 2018, that is $0.024 higher than the value for the third quarter of 2018. This 1.6% increase in operating cash cost before by-products is the result