SOUTHERN COPPER CORPORATION The following discussion provides information that management believes is relevant to an assessment and understanding of the condensed consolidated financial condition and results of operations ofSouthern Copper Corporation and its subsidiaries (collectively, "SCC", "the Company", "our", and "we"). This item should be read in conjunction with our interim unaudited Condensed Consolidated Financial Statements and the notes thereto included in this quarterly report. Additionally, the following discussion and analysis should be read in conjunction with the Management Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements included in Part II of our annual report on Form 10-K for the year endedDecember 31, 2019 . EXECUTIVE OVERVIEW Business: Our business is primarily the production and sale of copper. In the process of producing copper, a number of valuable metallurgical by-products are recovered, which we also produce and sell. Market forces outside of our control largely determine the sale prices for our products. Our management, therefore, focuses on value creation through copper production, cost control, production enhancement and maintaining a prudent capital structure to remain profitable. We endeavor to achieve these goals through capital spending programs, exploration efforts and cost reduction programs. Our aim is to remain profitable during periods of low copper prices and to maximize financial performance in periods of high copper prices. We are one of the world's largest copper mining companies in terms of production and sales and our principal operations are inPeru andMexico . We also have exploration programs inChile ,Argentina andEcuador . In addition to copper, we produce significant amounts of other metals, either as a by-product of the copper process or through a number of dedicated mining facilities inMexico .
Outlook: Various key factors will affect our outcome. These include, but are not limited to, some of the following:
Changes in copper, molybdenum, silver and zinc prices: In the second quarter of
2020, the average LME and COMEX copper prices were
respectively, 12.6% lower than in the same period of 2019. During the second
? quarter of 2020 per pound LME spot copper prices ranged from
Average molybdenum prices in the second quarter of 2020 decreased 32.1% and
zinc prices decreased by 28.8%, when compared to the average prices in the
second quarter of 2019. Average silver prices increased 11.4% in the second
quarter of 2020 when compared to the same period of 2019.
Sales structure: In the second quarter of 2020, approximately 82% of our ? revenue came from the sale of copper, 6% from molybdenum, 6% from silver, 3%
from zinc and 3% from various other products, including gold, sulfuric acid and
other materials.
Copper: In the second quarter of 2020, the LME copper price decreased from an
average of
of today, we are seeing prices slightly higher than
reflects the impact of the COVID-19 crisis on both the supply and demand for ? copper. At this point copper prices seem to be driven by two factors:
expectations of lack of supply in major producing countries such as
scenario of economic recovery. Since the pandemic is affecting both supply and
demand, at this point it is difficult to assess the long-term effect of this
crisis on the copper market balance and, consequently, on copper prices.
Molybdenum: Represented 6.0% of our sales in the second quarter of 2020.
? Molybdenum prices averaged
compared to
Molybdenum is mainly used in the production of special alloys for stainless
steel that require significant hardness and corrosion and heat resistance. New
uses for this metal are in lubricants, sulfur filtering of heavy oils and shale
gas production.
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Zinc: Represented 2.7% of our sales in the second second quarter of 2020. Zinc ? has very good long term fundamentals due to high levels of industrial
consumption and expected production.
Silver: Represented 5.6% of our sales in the second quarter of 2020 and it is ? currently our second by-product. We believe that the prices for silver will be
supported by its level of industrial use and the fact that, like gold, it
represents value shelter in times of economic turmoil.
? Cost: Our operating costs and expenses for the first six months of 2020 and
2019 were as follows:
Variance
2020 2019
Value %
Operating costs and expenses (in millions)
The increase was mainly due to higher cost of sales and higher depreciation, amortization and depletion in our Peruvian and Mexican open pit segments.
Production: In 2020, we expect to produce 997,100 tons of copper, in line with
2019 production and slightly lower than our initial production plan. Regarding
our by-products, we expect to produce 28,500 tons of molybdenum, an increase of
approximately 6.0% over our 2019 production level mainly due to the significant
contribution of the molybdenum plant at the new Toquepala concentrator. We also ? expect to produce 22.7 million ounces of silver, an increase of 11.7% when
compared to 2019, which is mainly attributable to a significant contribution
from the
2020, we expect to produce 78,600 tons of zinc from our mines, approximately
6.0% over our 2019 production level as a result of the recovery of production
at theSan Martin mine.
Capital Investments: In the first six months of 2020, we spent
figure registered for the same period in 2019, and represented 45.2% of net
income.
COVID-19: In
based on a rapid increase in global transmission rates. The full impact of the
COVID-19 outbreak will continue and the magnitude of the impact on the
Company's financial condition, liquidity and future operating results is
uncertain. Senior Management is actively monitoring the global situation´s
effect on the Company´s financial condition, liquidity, operations, suppliers, ? industry and workforce and is focusing principally on the health, safety and
well-being of our employees, their families and the communities where we have
operations. As of
of the materials and services critical for operations, and sales. In addition,
the supply of non-critical materials and services for the operations is
gradually being restored. We expect it to be fully restored by the end of the
third quarter of 2020. Additionally, shipments of products and collections
experienced no known major delays in the second quarter of 2020.
As ofJune 30, 2020 , we see a positive trend in copper price that closed at$2.74 per pound (LME) after the drop to$2.18 per pound that it experienced at the end of the prior quarter. Despite the current behavior of the copper market, there is still some uncertainty in the future of copper prices. The Company maintains a solid financial position and performance level, which allows us to deal with the effects of the pandemic without material effect on our operations and financial results, as shown in the table below: Jun-20 Dec-19 Jun-19 ($ in millions, except ratios) Cash and cash equivalents 1,808.8 1,925.1 752.2 Accounts receivable 937.7 911.8 935.8 Total assets 15,805.0 16,407.4 15,344.6 Long term debt 6,542.6 6,541.0 5,562.1 Sales 3,505.1 7,285.6 3,571.4 39 Table of Contents RATIOS
Current assets to current liabilities 4.33 2.83 2.24 Accounts receivable turnover (1) 3.74 7.99 3.82 Total debt ratio (2)
0.41 0.42 0.39
Net income margin (3) 13.5% 20.4% 22.1%
(1) Represents net sales divided by accounts receivable.
(2) Represents total debt divided by total assets.
(3) Represents net income divided by net sales, as a percentage.
Governmental authorities have declared that essential economic activities must continue during the COVID-19 sanitary emergency. These activities include industrial mining and/or any other activity necessary to secure the production and distribution of essential services such as electricity, medical and hospital infrastructure and manufacture of health related supplies and technological equipment, which necessarily implies critical components and goods only produced by industrial mining, which are essential in the global supply chains to manufacture products and services to fight the pandemic, such as steel, copper, gold, coal, silver, zinc and cement, among many others. Given the nature of mining operations, which are highly automated, conducted in remote locations and with mandatory use of personal safety equipment at all the mines, it is easier to implement and comply with COVID-19 protective measures, such as physical isolation and control of access to facilities. Industrial mining uses advanced and reliable machinery and does not require high physical concentration of employees. In many cases, workers fulfill their duties maintaining distances of more than 100 meters from their closest coworkers. At the present time, our operations are in compliance with all sanitary and government regulations and maintain proper environmental safeguards. Our COVID-19 emergency protocol has reinforced preventive measures such as disinfecting, clinical monitoring before work, cleaning and sanitizing of work areas and respect for social distancing. We have also restricted the access of contractors, suppliers and personnel to our facilities if visits are not indispensable and enforced multiple actions to limit workforce exposure to COVID-19 by imposing travel restrictions, prohibiting face-to-face meetings and urging frequent hand washing, as well as adhering to all other health, safety and social distancing measures required by governmental authorities.
Currently, our workforce at our operations are gradually returning back to the offices and we expect the same for our contractors and suppliers during the third quarter of 2020.
KEY MATTERS : Below, we discuss several matters that we believe are important to understand the results of our operations and financial condition. These matters include, (i) our earnings, (ii) our production, (iii) our "operating cash costs" as a measure of our performance, (iv) metal prices, (v) business segments, (vi) the effect of inflation and other local currency issues, and (vii) our capital investment and exploration program. 40 Table of Contents
Earnings: The table below highlights key financial and operational data of our Company for the three and six months endedJune 30, 2020 and 2019 (in millions, except copper price, percentages and per share amounts): Three months ended June 30, Six months ended June 30, 2020 2019 Variance % Change 2020 2019 Variance % Change
Copper price LME 2.42 2.77 (0.35) (12.6) % 2.49 2.80 (0.31) (11.1) % Pounds of copper sold 595.9 536.8 59.1 11.0 % 1,150.4 1,038.2 112.2 10.8 % Net sales$ 1,785.4 $ 1,818.0 $ (32.6) (1.8) %$ 3,505.1 $ 3,571.4 $ (66.3) (1.9) % Operating income$ 577.2 $ 713.6 $ (136.4) (19.1) %$ 1,110.4 $ 1,407.3 $ (296.9) (21.1) % Net income attributable to SCC$ 259.5 $ 402.4 $ (142.9) (35.5) %$ 474.3 $ 790.6 $ (316.3) (40.0) % Earnings per share$ 0.34 $ 0.52 $ (0.18) (34.6) %$ 0.61 $ 1.02 $ (0.41) (40.2) % Dividends per share$ 0.20 $ 0.40 $ (0.20) (50.0) %$ 0.60 $ 0.80 $ (0.20) (25.0) %
Net sales in the first six months of 2020 were 1.9% lower than in the same period of 2019 mainly as result of lower copper (-11.1% LME), molybdenum (-25.3%) and zinc (-25.0) prices. This effect was offset by higher sales volumes of copper (+10.8%), molybdenum (+26.8%) and silver (+17.8%).
Net income in the first six months of 2020 was 40.0% lower than in the same period of 2019. This decrease was mainly attributable to lower sales and to an increase in operating costs (+10.7%). Costs increased due to growth in sales volumes, leachable material costs and third party copper purchases. Higher costs were partially offset by lower fuel costs and the effect of exchange rates depreciation on local currency costs.
Production: The table below highlights our mine production data for the three
and six months ended
Three months ended June 30 ,
Six months ended
2020 2019 Variance % Change 2020 2019 Variance % Change
Copper (in million
pounds) 558.1 565.2 (7.1) (1.3) % 1,091.4 1,069.2 22.2 2.1 %
Molybdenum (in
million pounds) 17.2 14.8 2.4 16.3 % 33.1 26.2 6.9 26.4 %
Silver (in million
ounces) 5.5 4.9 0.6 13.5 % 10.8 9.2 1.6 17.3 %
Zinc (in million
pounds) 34.6 39.1 (4.5) (11.5) % 77.1 80.0 (2.9) (3.7) %
The table below highlights our copper production data for the three and six
months ended
Three Months Ended June 30, Six Months Ended June 30,
Copper (in million
pounds): 2020 2019 Variance % Change 2020 2019 Variance % Change
Toquepala 149.3 151.0 (1.7) (1.0) % 282.8 267.5 15.3 5.7 %
Cuajone 94.8 86.3 8.5 9.9 % 184.0 158.7 25.3 15.9 %
La Caridad 74.7 73.8 0.9 1.1 % 148.3 145.5 2.8 1.9 %
Buenavista 233.3 250.3 (17.0) (6.8) % 465.4 489.9 (24.5) (5.0) %
IMMSA 6.0 3.8 2.2 57.0 % 10.9 7.6 3.3 43.7 %Total mined copper 558.1 565.2 (7.1) (1.3) % 1,091.4
1,069.2 22.2 2.1 % Second quarter: Mined copper production in the second quarter of 2020 decreased slightly by 1.4% to 558.1 million pounds compared to 565.2 million pounds in the second quarter of 2019. This drop was mainly attributable to:
? Lower production at our
partially offset by
? Higher production at the Cuajone mine due to higher ore grades and recoveries.
Molybdenum production increased 16.3% in the second quarter of 2020 when compared with the second quarter of 2019 as result of higher production at our Peruvian mines, led by the new Toquepala molybdenum plant (+44.8%), which started production inApril 2019 , and by higher production at theBuenavista mine due to an increase in recoveries. 41 Table of Contents
Silver mine production increased 13.5% in the second quarter of 2020 due to
higher production at our IMMSA and
Mined zinc production decreased 11.5% in the second quarter of 2020, compared with the same period of 2019 , mainly due to lower production at theCharcas mine (-26.3%) and to the shutdown at theSanta Eulalia mine operation in the first quarter of 2020 due to severe flooding; these negative variances in zinc production were partially offset by a production increase at theSan Martin mine.
Six months: Mined copper production in the first six months of 2020 increased 2.1% the same period of 2019. This increase was due to:
Higher production at our Peruvian mines (+9.5%) due to an increase in ? recoveries at the Cuajone and Toquepala mines and higher ore grades at the
Cuajone mine.
? Higher production at
? Higher production at our IMMSA operations, principally at the San Martín mine.
These increases were partially offset by
? Lower production at the
Molybdenum production increased 26.4% in the first six months of 2020 compared to the same period in 2019 due to higher production at all our mines, and at our Toquepala mine in particular.
Silver mine production increased 17.3% in the first six months of 2020 due to higher production at our open pit and underground mines.
Zinc production decreased 3.7% in the first six months of 2020 due to lower production at ourCharcas mine and to the shut down at theSanta Eulalia mine due to severe flooding. We are currently evaluating different options to supply the concentrator atSanta Eulalia . This negative variance was partially offset by the higher production at the San Martín mine. Operating Cash Costs: An overall benchmark that we use, which is an industry metric that is commonly used to measure performance, is operating cash costs per pound of copper produced. Operating cash cost is a non-GAAP measure that does not have a standardized meaning and may not be comparable to similarly titled measures provided by other companies. This non-GAAP information should not be considered in isolation or as substitute for measures of performance determined in accordance with GAAP. A reconciliation of our operating cash cost per pound of copper produced to the cost of sales (exclusive of depreciation, amortization and depletion) as presented in the condensed consolidated statement of earnings is presented under the subheading, "Non-GAAP Information Reconciliation" on page 57. We disclose operating cash cost per pound of copper produced, both before and net of by-product revenues. We define operating cash cost per pound of copper produced before by-product revenues as cost of sales (exclusive of depreciation, amortization and depletion), plus selling, general and administrative charges, treatment and refining charges net of sales premiums; less the cost of purchased concentrates, workers' participation and other miscellaneous charges, including royalty charges, and the change in inventory levels; divided by total pounds of copper produced by our own mines.
In our calculation of operating cash cost per pound of copper produced, we exclude depreciation, amortization and depletion, which are considered non-cash expenses. Exploration is considered a discretionary expenditure and is also excluded. Provisions for workers' participation are determined on the basis of pre-tax earnings and are also excluded. Additionally excluded from operating cash costs are items of a non-recurring nature and the mining royalty charge as it is based on various calculations of taxable income, depending on which jurisdiction,Peru orMexico , is imposing the charge. We believe these adjustments will allow our management and stakeholders to see a presentation of our controllable cash cost, which we believe is one of the lowest among copper producing companies of similar size. 42 Table of Contents We define operating cash cost per pound of copper produced net of by-product revenues as operating cash cost per pound of copper produced, as defined in the previous paragraph, less by-product revenues and net revenue (loss) on sales of metal purchased from third parties. In our calculation of operating cash cost per pound of copper produced, net of by-product revenues, we credit against our costs the revenues from the sale of all our by-products, including, molybdenum, zinc, silver, gold, etc., and the net revenue (loss) on sales of metals purchased from third parties. We disclose this measure including the by-product revenues in this way because we consider our principal business to be the production and sale of copper. As part of our copper production process, much of our by-products are recovered. These by-products, as well as the processing of copper purchased from third parties, are a supplemental part of our production process and their sales value contribute to cover part of our incurred fixed costs. We believe that our Company is viewed by the investment community as a copper company, and is valued, in large part, by the investment community's view of the copper market and our ability to produce copper at a reasonable cost. We believe that both of these measures are useful tools for our management and our stakeholders. Our cash costs before by-product revenues allow us to monitor our cost structure and address operating management issues of concern. The measure operating cash cost per pound of copper produced net of by-product revenues is a common measure used in the copper industry and is a useful management tool that allows us to track our performance and better allocate our resources. This measure is also used in our investment project evaluation process to determine a project's potential contribution to our operations, its competitiveness and its relative strength in different price scenarios. The expected contribution of by-products is generally a significant factor used by the copper industry in determining whether to move forward with the development of a new mining project. As the price of our by-product commodities can have significant fluctuations from period to period, the value of its contribution to our costs can be volatile.
Our operating cash cost per pound of copper produced, before and net of
by-product revenues, is presented in the table below for the three and six
months ended
Operating cash cost per pound of copper produced (1)
(In millions, except cost per pound and percentages)
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 Variance % Change 2020 2019 Variance % Change
Total operating cash
cost before
byproduct revenues $ 684.6 $ 796.7 $ (112.1) (14.1) % $ (321.5) $ (352.5) $ 31.0 (8.8) %$ (661.7) $ (658.2) $ (3.5) 0.5 % Total operating cash cost net of byproduct revenues$ 363.1 $ 444.2 $ (81.1) (18.3) %
1,059.6 1,042.3 17.3 1.7 %
Operating cash cost
per pound before
byproduct revenues $ 1.26 $ 1.45 $ (0.18) (12.6) % $ (0.62) $ (0.63) $ 0.01 (1.3) % Operating cash cost per pound net of byproduct revenues$ 0.67 $ 0.81 $ (0.13) (16.7) %
(1) These are non-GAAP measures. Please see page 57 for reconciliation to GAAP
measure.
(2) Net of metallurgical losses.
As set forth on the above table, our per pound cash cost before by-product
revenues and net of it in the second quarter of 2020, was 12.6% and 16.7% lower
when compared with the second quarter of 2019, respectively. This result was
primarily attributable to a decrease in the production cost.
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For the six months ended June 30, 2020 , the operating cash cost per pound of
copper, including by-product revenue credits, was $0.72 . This represented an
improvement of 15.9% compared to the $0.85 reported in the same period of 2019.
This result was mainly due to a decrease in the production cost and to the unit
cost effect of higher production.
Metal Prices: The profitability of our operations is dependent on, and our
financial performance is significantly affected by, the international market
prices for the products we produce, especially for copper, molybdenum, zinc and
silver.
We are subject to market risks arising from the volatility of copper and other
metal prices. For the remaining six months of 2020, assuming that expected metal
production and sales are achieved, that tax rates are unchanged and giving no
effect to potential hedging programs, metal price sensitivity factors would
indicate the following change in estimated net income attributable to SCC
resulting from metal price changes:
Copper Molybdenum Zinc Silver
Change in metal prices (per pound
except silver-per ounce) $ 0.10 $ 1.00 $
0.10
Business Segments: We view our Company as having three reportable segments and manage it on the basis of these segments. These segments are (1) our Peruvian operations, (2) our Mexican open-pit operations and (3) our Mexican underground operations, known as our IMMSA unit. Our Peruvian operations include the Toquepala and Cuajone mine complexes and the smelting and refining plants, industrial railroad and port facilities that service both mines. The Peruvian operations produce copper, with significant by-product production of molybdenum, silver and other material. Our Mexican open-pit operations includeLa Caridad andBuenavista mine complexes, the smelting and refining plants and support facilities, which service both mines. The Mexican open pit operations produce copper, with significant by-product production of molybdenum, silver and other material. Our IMMSA unit includes five underground mines that produce zinc, lead, copper, silver and gold, a coal mine that produces coal and coke, and several industrial processing facilities for zinc, copper and silver.
Segment information is included in our review of "Results of Operations" in this item and also in Note 14 "Segment and Related Information" of our condensed consolidated financial statements.
Inflation and Exchange Rate Effect of the Peruvian Sol and the Mexican Peso: Our functional currency is theU.S. dollar and our revenues are primarily denominated inU.S. dollars. Significant portions of our operating costs are denominated in Peruvian sol and Mexican pesos. Accordingly, when inflation and currency devaluation/appreciation of the Peruvian currency and Mexican currency occur, our operating results can be affected. In recent years, we believe such changes have not had a material effect on our results and financial position. Please see Item 3. "Quantitative and Qualitative Disclosures about Market Risk" for more detailed information. Capital Investment Programs: We made capital investments of$214.3 million in the six months endedJune 30, 2020 , compared to$353.5 million in the same period of 2019. In general, the capital investments and investment projects described below are intended to increase production, decrease costs or address social and environmental commitments. Set forth below are descriptions of some of our current expected capital investment programs. We expect to meet the cash requirements for these projects from cash on hand, internally generated funds and from additional external financing, including funding received inSeptember 2019 . All capital spending plans will continue to be reviewed and adjusted to respond to changes in the economy, market conditions or the COVID-19 pandemic. Projects inMexico : Buenavista Zinc - Sonora: This project is located within theBuenavista facility and includes the development of a new concentrator to produce approximately 80,000 tons of zinc and 20,000 tons of copper per year. We have completed the basic engineering study and the detailed engineering analysis is underway. Site preparation has begun and stronger preventive measures to combat COVID-19 have been put in place. Purchase orders have been placed for major equipment and some is already being manufactured. The project has all the necessary permits. The project´s budget is 44 Table of Contents
Pilares - Sonora: This project, located six kilometers fromLa Caridad , will be developed as an open-pit mine operation with an annual production capacity of 35,000 tons of copper concentrate. The ore will be transported from the pit to the primary crushers of theLa Caridad copper concentrator through a new 25-meter wide off-road facility for mining trucks, which is under construction, and will significantly improve the over-all mineral ore grade (combining the 0.78% expected fromPilares with 0.34% fromLa Caridad ). The budget forPilares is$159 million and we expect the project to begin production in the first
half of 2022.El Pilar - Sonora: This is a low capital intensity copper development project strategically located inSonora, Mexico , approximately 45 kilometers from ourBuenavista mine. Its copper oxide mineralization contains estimated proven and probable reserves of 325 million tons of ore with an average copper grade of 0.287%.El Pilar will operate as a conventional open-pit mine and copper cathodes will be produced using the highly cost efficient and environmentally friendly SX-EW technology. We estimate a development investment of approximately$310 million . Construction at the pilot plant and experimental pads have ended and tests are being performed. The first results from experimental pads on leaching process have confirmed adequate levels of copper recovery. We expect this project to start production in 2023. TheSan Martin mine recovery program. After eleven years of illegal stoppage, we resumed control of theSan Martin mine inAugust 2018 . TheSan Martin facilities deteriorated during this period but we made a major renovation and restarted operations during the second quarter of 2019. Currently, the mine has 200,000 tons of ore and the concentrator has initiated production. During the first six months of 2020, we have produced 7,805 tons of zinc, 1.5 million ounces of silver and 1,835 tons of copper. The budget for the restoration program is$97.7 million . As ofJune 30, 2020 the program reported a total expense of$81.1
million. Projects inPeru :
Our main capital projects in
Tailings disposal at Quebrada Honda - Moquegua: This project increases the height of the existing Quebrada Honda dam to impound future tailings from the Toquepala and Cuajone mills and will extend the expected life of this tailings facility by 25 years. We have finished the second stage with the installation of a new cyclone battery station, which allows us to place more slurry at the dams. We are currently in the administrative close-out process for this project. Quebrada Honda dam expansion - Moquegua: This project aims to enlarge the main and lateral dams in Quebrada Honda and includes the relocation of some facilities due to dam growth, and implementation of other facilities for water recovery, among other factors. As ofJune 30, 2020 , the engineering study is complete and we have initiated the procurement process for the necessary materials and equipment. This project has a total budget of$77.0 million , of which we have invested$6.8 million as ofJune 30, 2020 . Potential projects We have a number of other projects that we may develop in the future. We evaluate new projects on the basis of our long-term corporate objectives, expected return on investment, environmental concerns, required investment and estimated production, among other considerations. All capital spending plans will continue to be reviewed and adjusted to respond to changes in the economy, market conditions or the COVID-19 pandemic.El Arco -Baja California : This is a world class copper deposit located in the central part of theBaja California peninsula, with ore reserves of over 2.6 billion tons with an ore grade of 0.410% and 0.113 grams of gold per ton. This project includes an open-pit mine combining concentrator and SX-EW operations with an estimated production of 135,000 tons of copper and 64,000 ounces of gold annually. We are currently in the land acquisition process for the project.
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Tia Maria - Arequipa: On July 8, 2019 , we were granted the construction permit
for this 120,000 ton annual SX-EW copper greenfield project with a total capital
budget of $1,400 million . The Government awarded the permit after completing an
exhaustive review process, complying with all established regulatory
requirements and addressing all observations raised.
The challenges surrounding the construction permit were overcome when on
Our commintment is to guarantee the population of Islay that the Tia Maria project will not adversely affect other local economic activities because we will use desalinated seawater for our operations and, to transport our supplies and copper production, we will build an 32 kilometer industrial railway and an access road at a safe distance from theTambo Valley . Our social programs in education, healthcare and productive development will continue to improve the quality of life, and the agricultural and livestock activities in theTambo Valley , as well as fishing and tourism in Islay. InJune 2019 , the Company launched a no-cost technical training program "Forging the Future", which focuses on making the hiring of local labor a priority and which will benefit 1,137 people in this province during the construction and operation phase. After training, the participants will be eligible to apply for one of the estimated 9,000 jobs (3,600 direct and 5,400 indirect) required during the Tia Maria construction phase. We strongly believe that the initiation of construction activities forTia Maria will generate significant economic opportunities for the Islay province and the Arequipa region. When operating, we expectTia Maria will generate a significant contribution through mining royalties and taxes from day-one and will directly employ 600 workers and indirectly, 4,200. This greenfield project, located in Arequipa,Peru , will use state of the art SX-EW technology with the highest international environmental standards. SX-EW facilities are the most environmentally friendly in the industry due to their technical process with no emissions released into the atmosphere.Los Chancas - Apurimac: This greenfield project, located in Apurimac,Peru , is a copper and molybdenum porphyry deposit. Current estimates indicate the presence of 545 million tons of mineralized material with a copper content of 0.59%, molybdenum content of 0.04% and 0.039 grams of gold per ton, as well as 181 million tons of mineralized leachable material with a total copper content of 0.357%.Los Chancas project envisions an open-pit mine with a combined operation of concentrator and SX-EW processes to produce 130,000 tons of copper and 7,500 tons of molybdenum anually. The estimated capital investment is$2,800 million and the project is expected to be in operation in 2026. In 2019, we continued to engage in social and environmental improvements for the local communities. Currently, we continue with these activities and plan to conclude the environmental impact assessment of the project.Michiquillay Project - Cajamarca: OnJune 12, 2018 ,Southern Copper signed a contract and made an initial payment of$12.5 million for the acquisition of the Michiquillay project in Cajamarca,Peru . The Company has created a multidisciplinary management team to plan the development of this project. As part of this plan, the Company has established contact with the local and regional authorities and communities in order to promote programs for the sustainable development of the area. In 2020, we continue to develop social and environmental programs for the local communities and have begun a semi-detailed environmental impact assessment. This will allow us to begin a 40,000 meter diamond drilling program in 2021 to verify and update the project´s estimated mineralized materials. Michiquillay is a world class mining project with estimated mineralized material of 1,150 million tons with an estimated copper grade of 0.63%. When developed, we expect Michiquillay to produce 225,000 tons of copper per year (along with by-products of molybdenum, gold and silver) for an initial mine life of more than 25 years, at a competitive cash-cost. We estimate an investment of approximately$2.5 billion will be required and expect production start-up by 2026 and that Michiquillay will become one of Peru´s largest copper mines. The project will create significant business opportunities in the Cajamarca region, generate new jobs for the local communities and contribute with taxes and royalties to the local, regional and national governments. The above information is based on estimates only. We cannot make any assurances that we will undertake any of these projects or that the information noted
is
accurate.
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ACCOUNTING ESTIMATES
Our discussion and analysis of financial condition and results of operations, as
well as quantitative and qualitative disclosures about market risks, are based
upon our consolidated financial statements, which have been prepared in
accordance with U.S. GAAP. Preparation of these consolidated financial
statements requires our management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. We make our best
estimate of the ultimate outcome for these items based on historical trends and
other information available when the financial statements are prepared. Changes
in estimates are recognized in accordance with the accounting rules for the
estimate, which is typically in the period when new information becomes
available to management. Areas where the nature of the estimate makes it
reasonably possible that actual results could materially differ from amounts
estimated include: ore reserves, revenue recognition, ore stockpiles on leach
pads and related amortization, estimated impairment of assets, asset retirement
obligations, determination of discount rates related to the financial lease
liabilities, classification of operating leases versus financial leases,
valuation allowances for deferred tax assets, unrecognized tax benefits and fair
value of financial instruments. We base our estimates on historical experience
and on various other assumptions that we believe reasonable under the
circumstances. Actual results may differ from these estimates under different
assumptions or conditions.
Long-term inventory-Ore stockpiles on leach pads:
OnJanuary 1, 2020 the Company aligned its capitalization method for its Peruvian and Mexican operations to capitalize based on the allocation of copper content recoverable between ore and leach material. In addition, the inventory consumption is now valued at the average unit cost, instead of the declining percentages of recovery method used previously. As a result of these changes, the value of capitalized material decreased by$48.8 million and the consumption increased by$10.3 million .
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