Southern Copper Corp (2Q23 Earnings)

July 28, 2023

Corporate Speakers

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


  • Matthew Murphy; Barclays Bank PLC; Analyst
  • Jens Spiess; Morgan Stanley, Research Division; Research Associate
  • Arthur Biscuola; Santander Investment Securities Inc.; Analyst
  • Matheus Moreira; Bradesco BBI; Analyst


Operator: Good morning, and welcome to Southern Copper Corporation's Second Quarter 2023 Results Conference Call.

With us this morning, we have Southern Copper Corporation's Mr. Raul Jacob, Vice President, Finance, Treasurer and CFO, who will discuss the results of the company for the second quarter 2023 as well as answer any questions that you may 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 not to 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 to Mr. Raul Jacob.

Raul Jacob: Thank you very much, Carmen. Good morning, everyone, and welcome to Southern Copper's Second Quarter of 2023 Results Conference Call. At today's conference, I'm joined by Mr. Oscar Gonzalez Rocha, CEO of Southern Copper and Board Member; as well as Mr. Leonardo Contreras, also a fellow Board Member.

In today's call, we will begin with an update on our view of the copper market and then review Southern Copper's key results related to production, sales, operating cost, financial results, expansion projects and ESG. After this, we will open the session for questions.

Now let us focus on the copper market. In the second quarter of this year, the London Metal Exchange copper price decreased 11% from an average of $4.32 per pound in the

second quarter of 2022, down to $3.85 per pound at the close, in average, for the second quarter. This reflects concerns about the impact of a slowdown of the Chinese economy, a possible recession in Europe and a soft landing or minor recession in the U.S. Current prices for copper are around $3.90 per pound, reflecting a less optimistic market than that seen in the last few quarters.

At this point, we see the following factors affecting the copper market: a reduction in global inflation, which may portend the end of the interest rate hike cycle led by the Fed and the ECB; a strong recovery of mining production of Peru, who had a 19% growth for the period January-May of this year. This is reducing the uncertainty on current production.

Chile is still lagging with a 5% reduction in copper production for the same period. Investments for future growth are still affected by expectations of economic changes in Chile and social unrest in Peru. These 2 countries, as you know, represent about 40% of the global supply. The most relevant market intelligent houses for the copper market are now expecting a market in surplus of about 100,000 tons for this year. This assumes a growth in demand of about 1% this year and also about the same level for the supply.

Low copper inventories is another factor that is affecting the copper market. As of March 31st, the sum of the London Metal Exchange, the COMEX Exchange, the Shanghai warehouse and the bonded warehouses in China add up to 411,000 tons of copper in inventories. That number has dropped to about 235,000 tons. This 42% reduction in inventories represents the largest dip since 2005. It is important to emphasize that copper plays a leading role in the global shift to clean energy, which correlates positively with our assertion that the underlying demand for copper will be strong in the long term.

Now let's look at Southern Copper's production for the past quarter. Copper represented 78% of our sales in the second quarter of 2023. Copper production registered an increase of 9% in the second quarter, in quarter-on-quarter terms, to stand at 227,533 tons. Our quarterly result reflects a 20% increase in production in Peru, driven by higher recoveries, the return to full operating capacity of the Cuajone mine and higher ore grades at Toquepala. So, the return of Cuajone at full speed and higher ore grades and mineral production at Toquepala are the drivers of the growth of 20% in Peruvian production.

Production at our Mexican operations increased 3% in a quarter-on-quarter terms. For 2023, we expect to produce 932,000 tons of copper, an increase of 4% over the 2022 final print. This growth will unfold as we get Peruvian production back on track and will be complemented with new production at our Mexican operations through our Pilares and Buenavista Zinc concentrator projects.

Molybdenum represented 11% of the company's sales value in the second quarter of this year and is currently our first by-product. Molybdenum prices averaged $20.80 per pound in the quarter, compared to $18.30 in the second quarter of last year. This represents an increase of 14%.

Molybdenum production increased by 0.2% in the second quarter compared to the same period of 2022. This was mainly driven by an increase in production at the Cuajone, Caridad and Buenavista mines due to higher ore grades at our Mexican operations and the Cuajone' s return to full operating capacity. These results were partially offset by lower production at the Toquepala mine. In 2023, we expect to produce 24,200 tons of molybdenum, which represents a decrease of 8% over our 2022 production level.

Silver represented 4% of our sales value in the second quarter of 2023 with an average price of $24.26 per ounce in the quarter, which reflected an increase of 7%. Silver is currently our second by-product. Mined silver production increased 8% in the second quarter versus the same period of 2022 after production rose at all our operations.

Refined silver production fell by 31% quarter-on-quarter, and this was mainly driven by a drop in production at our IMMSA and La Caridad units. In 2023, we expect to produce

20.1 million ounces of silver, an increase of 8% compared to 2022 and 6% higher than the 19 million ounces produced in 2021.

Zinc represented 3% of our sales value in the second quarter of 2023 with an average price of $1.15 per pound in the quarter, which represents a 35% decrease with regard to the second quarter of 2022 figure. Zinc is currently our third by-product. Zinc mine production increased 14% quarter-on-quarter and totaled 17,223 tons. This was driven primarily by an increase in production at the Santa Barbara and Charcas mines.

Refined zinc production increased by 10% in the second quarter vis-a-vis the second quarter of last year. For 2023, we expect to produce 108,000 tons of zinc, which represents an increase of 80% over our 2022 production level. This growth will be driven by the production and start-up of the Buenavista Zinc concentrator and by the recovery at the IMMSA mines where better ore grade areas has been identified. For 2024 and on, we expect to produce over 200,000 tons of zinc per year.

Financial results. For the second quarter of 2023, sales were $2.3 billion. This is almost the same that we sold in the second quarter of 2022. Copper sales volume increased by 12%, while value decreased 1% in a scenario of prices lower by 11%.

Regarding our main by-products, we reported higher sales of molybdenum that grew 28% due to better prices. Zinc sales, in turn, were down 22% due to lower prices, because we had a volume increase of 13%. Silver sales were down due to a decrease in volume, which was partially offset by better prices.

Our total operating cost and expenses decreased by $98 million or 7% when compared to the second quarter of last year. The main cost reductions were reported for workers' participation, purchased copper and other factors. These cost reductions were partially offset by higher costs for repair materials, operating materials, inventory consumption, labor cost and operation contractors and services. It should be noted that year-to-date, we registered unit cost reductions for grinding media, explosives and power costs.

Our second quarter of 2023 EBITDA was $1,115 million, which represents an increase of 9% with regard to the $1,021 million registered in the second quarter of last year. The EBITDA margin in the second quarter stood at 48% versus 44% in the second quarter of 2022. EBITDA in the 6 months of this year was $2,683 million. This is 1% lower than the EBITDA for the 6 months of 2022. The EBITDA margin in the 6 months of this year stood at 53%, which was the same as the 2022 mark.

Operating cash cost per pound of copper before by-product credits was $2.19 per pound in the second quarter of this year. That is $0.10 higher than the value for the first quarter of this year, which was $2.09. Even though copper production volumes increased 2% between the second quarter and the first quarter, the 5% increase in operating cash cost is attributable to higher cost per pound from production cost, treatment and refining charges and to lower premium.

Regarding our by-products, we had a total credit of $517 million or $1.07 per pound in the second quarter of 2023. These figures represent a 20% decrease when compared to the credit of $631 million or $1.33 per pound that we had in the first quarter of 2023.

By-product volumes increased for zinc, 14%; for silver, 9%; but decreased for molybdenum by 2%. Prices have decreased for molybdenum, 35%; for zinc, 19%; and increased for silver by 8%. As a consequence, total credits have decreased for all of our by-products.

Southern Copper operating cash cost, including the benefit of by-product credits, was $1.12 per pound in the second quarter of this year. This cash cost was $0.36 higher than the cash cost of $0.76 registered in the first quarter of 2023. And as you have noticed, mainly we had a 5% increase in operating cash cost, but a significant reduction in byproduct credits, and that basically explains the main change that we have in the cash cost.

2023 net income was $547 million, which represents a 27% increase with regard to the $432 million registered in the second quarter of 2022. The net income margin of the second quarter stood at 24% versus 19% in the second quarter of 2022. This increase was mainly the result of a 7% reduction in operating costs, which was mainly attributable to a decrease in lower third-party copper concentrate purchases. On a year-on-year basis, net income was 12% higher than in 2022 for similar reasons.

SCC's second quarter of 2023 net income fell below the $813 million reported in the first quarter of 2023. This dynamic reflects significant differences in copper prices in the period-over-period comparison. In the second quarter of 2023, copper sales dropped $365 million due to lower price. That alone represented an adjustment of $213 million.

Sales volume decreased 4%, and that's another $92 million. And we had an accounting adjustment on open sales for 104,000 tons of copper that represents about $59 million.

For the second half of this year, we have a very positive view on the company's sales volumes. And we are expecting that, looking at our current operation plans, the ramping

up of the new zinc concentrator in Buenavista and the Pilares project, we're expecting to produce 481,300 tons of copper, 11,400 tons of molybdenum, 76,000 tons of zinc and

10.9 million ounces of silver. An uptick in production for copper, zinc and silver in the second half of this year should support our sales through this period.

Cash from operations. Cash flow from operating activities in the 6 months of this year was $1,982 million, which represents an increase of 75% over the $1,131 million posted in the 6 months of last year. Cash flow in the first half of last year was affected by a significant reduction in working capital, which was attributable to the Cuajone mine stoppage.

Our current capital investment program for this decade exceeds $15 billion and includes investments in the Buenavista Zinc, Pilares, El Pilar and El Arco projects in Mexico and in the Tia Maria, Los Chancas and Michiquillay projects in Peru. This capital forecast includes several infrastructure investments, including key investments to bolster the competitiveness of the El Arco project.

Since there is a short description of our main capital projects in SCC's press release, I'm going to update new developments for each of them. For the Mexican projects, in the case of the Buenavista Zinc concentrator in Sonora, this is a project that is located within the Buenavista deposit where, as you know, we have built a new concentrator. This facility has a production capacity of 100,000 tons of zinc and 20,000 tons of copper per year. The capital budget of the project is $416 million, most of which has already been invested. Progress is 98%, and we have initiated vacuum testing at the plant and expect to initiate operations in August of this year.

For the project Pilares, also in Sonora, the budget for Pilares is $176 million, of which $131 million has been invested. Pilares is currently operating and delivering copper mineral to the facilities of the La Caridad operation.

In the case of El Pilar, the results from the experimental pads in the leaching process have confirmed adequate levels of copper recovery. Basic engineering study has been completed, and the company continues to develop the project and engage in on-site environmental activities. Project engineering is being developed by top-tier engineering and technology firms. We expect production to begin in 2025, and mine life is estimated at 13 years.

El Arco, which is a project in Baja California, the company has completed the environmental baseline study for the mine, concentrator and industrial facilities, and will proceed to submit the Environmental Impact Statement or Manifestación de Impacto Ambiental, MIA, to the Secretary of Environment and Natural Resources, SEMARNAT, to request the respective environmental impact permits. The company is currently preparing studies for the port, power pipelines, townsites and auxiliary facilities.

For the Peruvian projects, for Tia Maria, Southern Copper has been consistently working to promote the welfare of the population of the Islay province. As part of these efforts, we


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Southern Copper Corporation published this content on 17 August 2023 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 17 August 2023 21:30:04 UTC.