Southern Copper : SCC conference call 1Q21 transcript

Southern Copper (1Q20 Earnings)

April 28, 2021

Corporate Speakers:

• Raul Jacob Ruisanchez; Southern Copper Corporation; VP of Finance, Treasurer & CFO
• Oscar Gonzalez Barron; Vice-president Control and Administration of Americas Mining Corporation

Participants:

• Timna Tanners; BofA Securities; MD
• Thiago Lofiego; Banco Bradesco BBI S.A.; Director & Head of the LatAm Pulp & Paper and Metals & Mining Equity Research
• Carlos De Alba; Morgan Stanley; Equity Analyst
• Rodrigo Salazar; AM Advisors; Analyst
• Ivan Fernandez; KINEA; Analyst
• Leopoldo Silva; LarrainVial S.A.; Analyst
• Andreas Bokkenheuser; UBS Investment Bank; Executive Director, Head of LatAm Mining & Basic Materials and Research Analyst
• Fernando Assad; Ashmore; Analyst
• Alfonso Salazar; Scotiabank Global Banking and Markets; Director of Metals and Mining & Analyst
• Jean Bruny; BBVA Corporate and Investment Bank; Chief Analyst

PRESENTATION

Operator: Good morning, and welcome to Southern Copper Corporation's First Quarter 2021 Results Conference Call. With us this morning, we have Southern Copper Corporation, Mr. Raul Jacob, Vice President, Finance, Treasurer and CFO, who will discuss the results of the company for the first quarter 2021 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 a result of new information, future events or otherwise. All results are expressed in full U.S. GAAP.

Now I'll pass the call on to Mr. Raul Jacob.

Raul Jacob Ruisanchez: Thank you very much, Jenny. Good morning, everyone, and welcome to Southern Copper's First Quarter 2021 Results Conference Call. At today's

conference, I am accompanied by Mr. Oscar González Rocha, Southern Copper's CEO and Board member.

Before we go into the details of the past quarter, let me first express my best wishes for you and your loved ones during these trying times. In today's call, we will begin with an update on the measures that we have taken to keep COVID-19 at bay. We will then review the copper market and Southern Copper's key results for production, sales, operating costs, financial results and expansion projects. Subsequently, we will open the session for questions.

Let me say first that since the beginning of the pandemic, Southern Copper has faced its challenges with resilience innovation and solidarity. The new normal that the virus has imposed in the world requires government, companies and society to work together to protect citizens as we resume growth, generate value and fuel economic recovery. In this regard, we believe that the vaccination efforts, which have been carried out by the State of Sonora in Mexico, represent a positive development.

Through this endeavor, 100% of the medical personnel at our operations have been vaccinated. Similarly, 98% of the workers over the age of 60 in Cananea, and 100% of those in Nacozari have also received a vaccine. This significant advance gives our personnel needed protection against the COVID-19 virus, provides peace of mind to workers and their families and allows the company to begin normalizing operating levels at our installations. Our company is contributing to this effort by providing logistical support during the vaccination rollout.

Now let us focus on the copper market, the core of our business. For copper, in the first quarter of 2021, the London Metal Exchange copper price increased from an average of $2.56 per pound in the first quarter of 2020, up to $3.85 per pound. That is a 50.4% increase in copper prices. As of today, we're seeing prices at about $4.50 per pound, which bodes a positive outlook for the 2021 copper market. We believe the following factors are influencing the market at this point. The automobile industry global recovery was reflected in an increase in sales of 89% in the first quarter of 2021. The $2 trillion infrastructure package announced by President Biden will significantly increase the demand for copper, which is a fundamental element at green energy facilities.

The combined inventories of the London Metal Exchange, COMEX, Shanghai and bonded warehouses remain at relatively low levels, particularly given the number of days of consumption considered by this inventory. The most important market intelligent houses for the copper market are expecting a market deficit this year due to a significant recovery in demand, which should be between 3.5% and 5.5%.

Now let us look at Southern Copper's production for the past quarter. Copper represented 83.6% of our sales in the first quarter of this year. Copper production registered a slight decrease of 1.5% compared to the first quarter of last year and situated at 238,402 tons in the first quarter of this year. This was primarily attributable to lower production at our Peruvian mines and La Caridad mine in Mexico. This was driven by a decrease in ore

grades. However, it was partially offset by an increase in production in our IMMSA operations, which was spurred by a recovery in production of 52.8% of additional production at the San Martin mine.

Molybdenum represented 6.7% of the company sales value in the first quarter of 2021 and is currently our first by-product. Molybdenum prices averaged $11.19 per pound in the quarter compared to $9.56 in the first quarter of 2020. This represents a 17.1% increase. Molybdenum production increased slightly by 0.2% in the first quarter of this year compared to the same period of 2020. This was mainly due to higher production at our Peruvian mines, an increased production of molybdenum by about 10% due to higher grades and recoveries. And it was also partially offset by a decrease in production at our Buenavista mine due to lower grades.

For silver, it represented 5.5% of our sales value in the first quarter of this year with an average price of $26.29 per ounce of silver in the quarter, up 55.8% from the first quarter of last year. Silver is currently our second by-product. Mined silver production decreased by 6.3% in the first quarter of this year after production fell at Buenavista, IMMSA and Toquepala. This was partially offset by higher production from the Cuajone and Caridad operations. Refined silver production increased by 6% in the first quarter of this year mainly due to higher production at our IMMSA facilities.

Zinc represented 1.4% of our sales value in the first quarter of this year with an average price of $1.25 per pound in the quarter. This is a 28.9% increase in price from the same period of 2020. Zinc mine production decreased by 14.5% quarter-on-quarter to situate at 16,466 tons. This was primarily attributable to lower ore grades at the Santa Barbara operation and Charcas. And to the shutdown of our Santa Eulalia operation in the first quarter of last year due to a severe flooding. Refined zinc production decreased by 35.7% in the first quarter compared to the same period of 2020 due to a fire at the facility. This has temporarily reduced the capacity of our San Luis Potosi zinc refinery.

For our financial results, in the first quarter of 2021, sales were $2.5 billion, which is $812.8 million higher than the sales for the first quarter of 2020. Our sales increased by 47.3% in total. Copper sales volume decreased by 4.5%, while the value increased by 55% due to a scenario of better prices. As I said, copper prices increased by 50.4% during the past quarter.

Regarding our main by-products, we reported higher sales of molybdenum by 34.6% mainly due to better prices. Prices increased by 17.1% for molybdenum. And we had open sales adjustments that complete the 34.6% increase in molybdenum sales.

For silver, sales increased by 57.6%, also due to better prices. In this case, prices increased by 55.8%. These results were partially offset by a decrease in volume of 3.3% and sales of zinc due to lower volumes of refined zinc. This was partially offset by higher zinc price.

Our total operating cost and expenses decreased by $5.5 million or 0.5% when compared to the same period of 2020. The main cost reductions were driven by a decrease in copper purchases from third parties and an increase in capitalized leachable material. These cost reductions were partially offset by an increase in workers' participation, an uptick in energy cost due to a temporary gas shortage in Northern Mexico, an increase in diesel and fuel cost and higher figures for inventory consumption for the quarter. We also had higher depreciation and other factors for a minor value.

Let me focus on the increase due to temporary gas shortage that we had in the first quarter. That represented an increase in energy cost of about $30.6 million as a consequence of the temporary scarcity that we had in February of natural gas in the northern part of Mexico.

Our first quarter '21 adjusted EBITDA was $1,554.5 million, which represented an increase of 116.3% compared to the same period of 2020, where the adjusted EBITDA was $718.8 million. The EBITDA margin in the first quarter of this year was 61.4%, and that compares with 41.8% in the first quarter of last year. On a quarter-on-quarter basis, adjusted EBITDA was 24% higher than in the fourth quarter of 2020.

For the cash cost, operating cash cost per pound of copper before by-product credits was $1.51 per pound in the first quarter of 2021. This is $0.074 higher than the value for the fourth quarter of 2020. This 5.2% increase in operating cash cost is a result of higher cost per pound from production cost and lower premiums, which were partially compensated by lower treatment and refining charges and lower administrative expenses. Southern Copper operating cash cost, including the benefit of by-product credits, was $0.739 per pound in the first quarter of this year. This cash cost was $0.067 higher than the cash cost of $0.672 that we had in the fourth quarter of 2020. That is a 10% increase in cash cost.

Regarding by-products, we had a total credit of $393.7 million or $0.771 per pound in the first quarter of this year. These figures represent a 1% increase when compared to a credit of $0.763 per pound in the fourth quarter of 2020. Total credits have increased for molybdenum, silver, gold and sulfuric acid and decreased for zinc.

Net income attributable to SCC shareholders in the first quarter of this year was $763.8 million, that is 30.2% of our sales or diluted earnings per share of $0.99.

Capital investments. As you know, Southern Copper's investment philosophy is not based on the outlook for copper prices but on the quality of the assets that we operate and develop. Throughout the years, our strong financial discipline has consistently allowed us to make ongoing investments in our considerable asset portfolio. The conditions generated by COVID-19 has led us to implement measures to reduce vulnerability at the project execution level.

These measures, which are constantly under review, include enforcing social distance rules, strengthening sanitation efforts and requiring quarantine periods for personnel.

Some activities in the project execution stage, which are located in regions in Peru or Mexico where new cases of infections are on the rise, have experienced delays.

Consequently, we expect some delays, albeit minimal at this point. We expect these delays in the execution of our investment projects. Nevertheless, to date, delays primarily affect construction activities that require personnel to work in close physical proximity. All other engineering, procurement and construction activities that entail limited interaction between personnel are on schedule.

In the first quarter of 2021, we spent $232.6 million on capital investments, which represented 130% increase with regard to the same period of 2020 and accounted for 30.5% of our net income.

For the Peruvian projects, our portfolio for approved projects in Peru totaled $2.8 billion, $1.6 billion of which has already been invested. If we include the up and coming Michiquillay $2.5 billion budget, and Los Chancas $2.6 billion budget. These two projects will increase our total investment program in Peru to reflect a commitment of $7.9 billion.

For Tia Maria, a project that is located in the Peruvian region of Arequipa, Southern Copper has been consistently working to promote the welfare of the Islay province population. As part of these efforts, we have implemented successful social programs in education, healthcare and productive development to improve the quality of life in the region. We have also promoted agricultural and livestock activities in the Tambo Valley and supported growth in manufacturing, fishing and tourism in Islay.

On January 7, 2021, this is the past quarter, the mayor of the Islay province awarded a City Diploma to Southern Copper in recognition of the company's efforts to assist the population of Islay during the COVID-19 pandemic. Southern Copper provided medical assistance, test, oxygen, personal protection equipment and food stuff for the population in the area of influence of the Tia Maria project. We reiterate our view that the initiation of construction activities at Tia Maria will generate significant economic opportunities for the Islay province and the Arequipa region. Given the current Peruvian economic situation, it is crucial to move ahead on projects that will stimulate a sustainable growth cycle.

During the construction and operation phase, we will make it a priority to hire local labor to fill the 9,000 jobs of which 3,600 are direct and 5,400 are indirect jobs that we expect to generate during the Tia Maria construction phase. When operating, we expect Tia Maria to directly employ 600 workers and indirectly provide jobs for another 4,200. Additionally, from day 1 of our operations, we will generate significant contributions to revenues in the Arequipa region via royalties and taxes.

We expect the Peruvian government to acknowledge the significant progress the company has made on the social front for this project and the important contributions that