Southern Copper Corp/ Q1 FY2020 Earnings Call

Good morning, and welcome to the Southern Copper Corporation’s First Quarter 2020 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 2020, as well then answer any questions 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 risk and uncertainties. Actual results may differ materially, and the company cautions 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 expected in all U.S. GAAP. Now, I will pass the call to Mr. Raul Jacob.

Thank you very much, and good morning everyone. Welcome to Southern Copper's first quarter 2020 results conference call. Participating with me in today's conference are Mr. Oscar Gonzalez Rocha, Southern Copper's CEO and Board member; and Mr. Xavier Garcia de Quevedo, also a 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, in these difficult times that we're currently facing. In today's call, we will begin with an update from the fight against the COVID-19 pandemic and its impact on our operations. We will then review the copper markets and 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. The fight against the COVID-19 pandemic. Taking proper care of our personnel has always been of paramount importance to our company. While confronting the COVID-19 pandemic in the countries where we operate, Southern Copper continues essential operations in compliance with local emergency measures. As soon as COVID-19 was declared a pandemic, Southern Copper implemented rigorous hygiene and sanitation protocols at all of its facilities to protect the health and welfare of its employees, their families, and the neighboring communities. The statements from governmental authorities have made it clear that essential economic activities must continue during the COVID-19 health emergency and that industrial mining, which is closely linked to chemical and construction industries, is essential to the requirements of electrical, hospital, and medical infrastructure, as well as for the manufacturing of health-related supplies and technological equipment. These industries are indispensable and strengthen the infrastructure of manufacturing, logistics, and support global supply chains. The strategic position of industrial mining as a supplier of key materials such as steel, copper, gold, coal, silver, zinc, and cement has been recognized by the US, Canada, Mexico, and Peru. These countries have confronted COVID-19 through social distancing and stay-at-home measures and recognize that industrial mining is indispensable to avoid the interruption of supply chains of essential products to fight the pandemic. Copper is indispensable for the manufacturing of specialized cables required to produce high-voltage electrical installations that supply electric power to local communities, hospitals, and supply centers. Indeed, copper is essential for the manufacturing of electrical components required to generate, transmit, and distribute electric power to urban centers. Electrical and electronic copper components are also necessary for medical equipment and appliances, cell phones, computer hardware, digital data transmission, images, and voice. Copper is also required in surfaces to remove viruses and bacteria, which makes it essential for the production of drinking water and air conditioning systems. Chemical industries with their metallurgical processes have proved to be vital in the fight against the COVID-19 pandemic affecting the world. Given the nature of mining operations, with a highly automated process that is conducted in remote locations and with mandatory use of personal safety equipment, it is easier to implement and comply with COVID-19 protective measures, such as physical isolation and access control. Industrial mining uses advanced and reliable machinery and does not require a high physical concentration of employees. In many cases, workers fulfill their duties maintaining distances of more than 100 meters from their coworkers. The Company has developed a rigorous COVID-19 emergency protocol and only 40% of the labor force in Mexico, or about 6,300 employees, are currently working on site under strict safety measures. The remaining workforce of 8,751 employees are working from home, including all high-risk individuals due to age or prior medical conditions. For the Peruvian operations, about 3,500 employees, or 39% of the workforce are working on site under strict safety measures, while the remaining 5,468 employees are working from home or staying at home. It should be noted that to date, there have been no known cases of COVID-19 contagion among our employees at our mining facilities in Mexico and Peru. 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 access to contractors, suppliers, and non-essential personnel and enforced multiple actions to limit workforce exposure to COVID-19, such as travel restrictions, prohibiting face-to-face meetings, and urging frequent hand washing, as well as adherence to all other health, safety, and social distancing measures issued by governmental authorities. From the beginning of the COVID-19 pandemic, Southern Copper has implemented strong preventive measures to protect the health of its workers, their families, and their communities. For this purpose, the Company has approved a budget of $11.2 million for donations and general support for the population of Peru and Mexico. As a way to mitigate the pandemic, we have donated medical supplies and dozens of mechanical ventilators for breathing support to hospitals in the communities where we operate. In Sonora, we have established 88 confined beds in company housing property to serve as temporary sanitary facilities for people presenting symptoms of respiratory disease who require isolation or moderate hospital care. We are also donating over 200,000 items of personal protection equipment to medical staff and 30,000 hygiene kits to our workers and to the population of our areas of influence, including general information materials about the pandemic. We have also donated cleaning and personal protection equipment to the staff members of the National Guard of Mexico and the Peruvian police and army. Additionally, we are helping vulnerable individuals, such as the elderly or disabled persons and pregnant women by donating more than 30,000 kits containing food and hygiene items. In addition to the above-mentioned efforts, we have installed more than 200 portable sinks in strategic areas of the communities in order to reinforce preventive hand washing. Moreover, to endorse the stay-at-home measures, we have offered over 350 sports, cultural, and educational workshops online, and over 58,000 virtual instructing activities have been watched by 3,700 students from the schools sponsored by our Company. Additionally, throughout our Community Care Service, we offer free medical, psychological, and employment counseling 24 hours a day. Now let us focus on the copper market, the core of our business. Copper prices during the first quarter of this year, on the London Metal Exchange, decreased from an average of $2.82 per pound in the first quarter of 2019 to $2.56 per pound, a 9.2% reduction. As of today, we're seeing prices in the range of $2.20 to $2.30 per pound. Today, it's about $2.33, reflecting the impact of the COVID-19 crisis on demand and copper supply. The world is currently experiencing the public health, financial, and economic impacts of the COVID-19 pandemic. Since it is affecting both supply and demand, at this point it is difficult to assess the full effect of this crisis on the copper market balance and on copper prices. Let me say that in a normal year, we expect to have a seasonal copper inventory increase of about 200 to 250,000 tons in the first quarter of the year due to the New Year's festivities in China and winter's impact on demand in the Northern Hemisphere. This year, we have the COVID-19 outbreak as an additional factor affecting copper demand and supply, and obviously copper prices. At the end of 2019, copper demand for refined copper was estimated at 23.6 million tons, and global inventory, which is the addition of the London Metal Exchange, the COMEX, in Shanghai warehouses, and an estimate on bonded warehouses, was reported at 599,000 tons. By the end of February of this year, total inventory in warehouses added up to 917,000 tons, which is 318,000 tons higher than the inventories at the end of last year. Last Friday, April 24, global inventories were estimated at 925,000 tons. This is 326,000 tons over the closing of 2019. This is not a reliable stable mark since the increase observed at the end of February. We believe this reflects the mentioned seasonal effects of about 250,000 tons due to the Chinese New Year and the winter effect I mentioned, as well as the additional market surplus created by the COVID-19 pandemic. In a normal year, we expect additional inventory to be partially absorbed through the rest of the year. For 2020, it is difficult to estimate when these may happen since we are seeing a much weaker demand than last year. Let’s now focus on Southern Copper’s production for the past quarter. Copper represented 79.4% of our sales in the first quarter of 2020. Copper production increased by 5.8% to 241,967 tons in the first quarter compared to 228,629 tons in the first quarter of last year. This was principally due to high production at our Peruvian mines. Toquepala mine production increased by 14.5%, as a result of additional copper production of 8,574 tons from the new concentrator, and Cuajone mine production increased by 23.2% due to higher ore grades and greater recoveries. In Mexico, copper production slightly increased by 1.4% when compared to last year's first quarter, mainly due to lower production at the Buenavista operations as a result of lower ore grades. This effect was partially offset by higher production at our IMMSA unit, which increased its total production by 30.5% as a result of the restoration of the San Martin mine operations. For molybdenum, it represented 7.3% of the company's sales value in the first quarter of 2020 and is currently our first by-product. Molybdenum prices averaged $9.56 per pound in the quarter, which compares with $11.70 per pound in the first quarter of 2019, an 18.3% decrease. Molybdenum mine production increased by 39.7% in the first quarter of 2020 compared with the first quarter of last year. It was principally due to significantly higher production at our Toquepala mine. We had a new molybdenum plant starting in the second quarter of 2019, and as a result, the Toquepala mine increased its production by 280% in the first quarter of this year. This plant produced 993 tons of new molybdenum production and as I say began operation in April of last year. We also had the benefits of much higher production of molybdenum at Cuajone, which increased its molybdenum production by 42.6% due to higher grades. Silver represented 5.1% of our sales value in the first quarter of 2020 with an average price of $16.87 per ounce in the quarter, an 8.7% increase from the first quarter of last year. Silver is currently our second by-product. Mined silver production increased by 21.6% in the first quarter from this year from the first quarter of 2019, as a result of higher production at all our operations, particularly at IMMSA, the underground complex mines that we have, which increased its production by 35.7% due to restored production at the San Martin mine, which approximated 607,000 ounces in the first quarter of this year. In addition, there was higher production at the Toquepala mine, which increased its production by 16.3% in silver, totaling 128,000 ounces from the new concentrator, as well as higher production at the Buenavista mine, which increased its production by 13.3% due to higher grades and recoveries. For zinc, it represented 3.8% of our sales volume in the fourth quarter of this year with an average price of $0.97 per pound in the quarter, a price increase of 21.1% from the first quarter of last year. Zinc mine production increased by 3.8% to 19,263 tons in the first quarter of 2020, mainly due to 2,851 tons of new production coming from the San Martin mine, as well as increased production in the Charcas mine, which increased its production by 9%. In Santa Barbara, the production also increased by 7.2%. These two operations, plus the San Martin, increased, were partially offset by Santa Eulalia mine production reduction that cut down its production by 90%. Regarding this operation, the company has decided to shut down its mine facility due to several closing events at the mine. We're currently evaluating different options to supply the concentrator of Santa Eulalia. Refinancing production increased by 8.5% in the first quarter of 2020 compared to the first quarter of 2019. Financial results. For the first quarter of 2020, sales were $1.7 billion, which is $33.7 million lower than sales for the first quarter of last year, a 1.9% lower result. Copper sales volume increased by 10.6%, while value decreased by 3.5% due to lower prices. As I mentioned, London Metal Exchange price decreased by 9.2% in the quarter. Regarding our main by-products, we have higher sales of molybdenum, up by 6.6% due to higher volume or 41.9%, partially offset by lower prices. Silver sales increased by 14.7% due to higher volume and better prices. For sales of zinc, even though we had higher volume of 7.1%, its value was lower by 15.4% due to lower prices. Our total operating costs and expenses increased by $126.7 million or 12% when compared to the first quarter of 2019. The main cost increment has been in purchased copper, $77.4 million, lower capitalized leachable material $73.5 million, the term materials $16.8 million, depreciation $11.3, and other factors. These cost increments were partially compensated by exchange rate variances that decreased costs by $30 million and lower inventory consumption by $20.6 million, while fuel costs decreased by $8.7 million in the first quarter. Regarding EBITDA, for the first quarter of 2020 it was $719.8 million, which represents a 41.8% margin compared with $889 million, or a 50.8% margin in the first quarter of 2019. Operating cash cost per pound of copper before by-product credits was $1.41 per pound in the first quarter of 2020. That is $0.171 lower than the value for the fourth quarter of last year. This 10.8% decrease in operating cash cost is a result of lower cost per pound from production costs, treatment and refining charges, and administrative expenses, partially offset by lower premiums. Southern Copper’s operating cash cost, including the benefit of by-product credits, was $0.774 per pound in the first quarter of 2020, which was $0.204 lower than the cash cost of $0.978 per pound in the fourth quarter of 2019. This is a 20.9% reduction in cash costs. Regarding by-products, we had total credits of $332.2 million or $0.641 per pound in the first quarter of 2020. These figures represent a 5.6% increase when compared with the credit of $0.607 per pound in the fourth quarter of 2019. Total credits have increased for molybdenum, zinc, and sulfuric acid while decreasing for phosphates. Net income attributable to SCC shareholders in the first quarter of 2020 was $214.8 million, that is 12.5% of sales or diluted earnings per share of $0.28 per share. Capital expenditures. Southern Copper has an investment philosophy of not basing its growth on the outlook of copper prices, focusing instead on the quality of the assets that we operate and develop. Throughout the years, our strong financial discipline has consistently allowed us to invest on a continuous basis in our asset portfolio. In the first quarter of 2020, we spent $101 million in capital investments, which is a 41.7% decrease compared to the same period in 2019, and represented 58.8% of our net income for the quarter. For the Peruvian projects, we currently have a portfolio of $2.8 billion of approved projects in Peru, of which $1.6 billion has already been invested. Considering the upcoming Michiquillay $2.5 billion project and Los Chancas, a $2.8 billion project, our total investment program in Peru will increase to $8.1 billion. For Tia Maria, on July 8 of 2019 we received a construction permit for this 120,000 tons annual SX-EW copper greenfield project with a capital budget of $1.4 billion. The government awarded the permit after completing an exhaustive review process of environmental and social matters, recognizing compliance with all established regulatory requirements and addressing all observations. The challenges to the construction permit were decided on October 30 of last year, and the Mining Council of the Peruvian Ministry of Energy and Mines granted the construction permit for the Tia Maria project. For the Mexican projects, we have three in Mexico: the Buenavista concentrator, which is in Sonora. This project is located within the Buenavista 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. Currently, we have completed the basic engineering, and the detailed engineering is in process. Site operations have started, and purchase orders for new equipment have increased. The project is fully permitted. The capital budget is $430 million, and we expect to initiate operations in the third quarter of 2022. When completed, this facility will double the company’s zinc production capacity and will provide 409 direct jobs and 1,417 indirect jobs. For the Pilares project, also located in Sonora, it is operating 6 kilometers away from La Caridad. This project consists of an open pit mine operation with an annual production capacity of 35,000 tons of copper and constitutes a new 25-meter wide off-road facility for mining traffic under construction that will be used to transport the ore from the pit to its primary crushers of the La Caridad copper concentrate. This project will significantly improve the overall mineral ore grades, combining the 2.78% effective from Pilares, and the ore grade of Pilares with the 2.34% ore grade from La Caridad. The budget for Pilares is $159 million, and we expect to start production in the first half of 2022. The whole project in Mexico that we're undertaking is project El Pilar, also in Sonora. This is a low capital-intensive greenfield project located approximately 45 kilometers from our Buenavista mine. Its copper oxide mineralization contains estimated proven probable reserves for 325 million tons of ore with an average copper grade of 28.7%. In Pilares, we 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. The budget for Pilares is $310 million, and we expect it to start in about 2023. The construction of the pilot plant is finished, and the production tests are being developed with encouraging results. Regarding dividends, as you know, it is company policy to review at each Board meeting the company's cash position, expected cash flow generation from operations, capital investment plans, and other financial needs in order to determine the appropriate quarterly dividend. Accordingly, as announced to the market on April 23rd, the Board of Directors authorized a cash dividend of $0.20 per share of common stock, payable on May 26 to shareholders of record at the close of business on May 13 of this year. Despite the strong cash position of the company and reasonably good results for the quarter, due to uncertainty surrounding the metal markets and global economy and the important expansions planned by our company, the Board has taken a more cautious approach regarding dividends. Consequently, our Board approved a dividend equivalent to 50% of what the company has been paying during the last few quarters. Considering Southern Copper’s strong financial condition and competitive cost structure, we have no doubt that Southern will endure the current difficult times and overcome the crisis. With this in mind, ladies and gentlemen, thank you very much for joining us, and we will now open the phone for questions.

Thank you. And our first question is from Alfonso Salazar with Scotiabank. Please go ahead, Alfonso.

Thank you and good morning, everyone. Thank you for the presentation, Raul. The question I have is regarding the operations in Mexico. If you can clarify if you expect any impact from the temporary closures that the government announced to mining operations. What is the status there? If you can clarify what is the status of operations in Mexico? And if you can provide guidance on production for the full year and the CapEx guidance as well? Thank you.

Thank you very much for your question, Alfonso. Well, as we have mentioned in our report, we're operating with about 40% of our workforce in Mexico and 39% of it in Peru, following and complying with all regulations established by the authorities in both countries. When you operate with this lower part of your usual and recommended workforce, certain maintenance work and tasks at the mine operations get postponed. In Peru, our plants are confined at the mine in the sense that we have mutually agreed with our workforce to shut down the facilities to avoid the possibility of contagion. So we're following, as I mentioned, very strict protocols for our operations, which including our suppliers of the materials required to operate. At the mines, generally speaking, we have postponed several works related to leachable material and stripping. That's something that is put aside during this time of emergency. In Peru, we are expecting the authorities to open up certain activities that are concurrent with mine operations and allow us to operate at a much higher activity level than what we're doing now. In Mexico, we're currently operating, as I said, with 40% of the workforce on the metallurgical side. This is considered part of the chemical industries, and that we have no significant cessation to our operations other than having the material available which is restricted due to the measures taken by the authority. At this point, for the year, it's hard to provide guidance. We will provide more certain guidance in July when we have a better handle on where we stand in terms of production and the emergency plans we can put in place once we have more openness to operate our facilities due to the slowing down of the crisis and changing regulations. Having said that, we estimate that we may have a smaller production of about 3% to 4% for 2020 compared to our initial plan, which reflects our current view on copper.

Okay. Thank you.

Thank you. Our next question is from Carlos de Alba with Morgan Stanley. Please go ahead, Carlos.

Thank you very much. And good morning, everyone. I was just wondering if you could clarify whether the mines in Mexico are producing or not. My understanding is that the mines in Peru are producing, but it seems that the company is implying that the mining sector in both countries was declared essential. However, that is not clear from your comments. Also, could you please talk about how do you see the impact of the deferral of stripping costs in the second quarter and then beyond, as the company needs to catch up with these delays? Thank you very much.

Thank you for your question, Carlos. On the Mexican mines, let me first mention that in the Peruvian mines our operations are running at a very high capacity level, over 90% most of the time and close to capacity on certain days. Our mines in Peru are confined or shut down, which means that if workers leave, they cannot return until the quarantine established by the authorities ends. On the metallurgical front, we're operating, producing concentrate and smelting those materials. In the case of the Mexican operations, certain facilities cannot be stopped. For example, the SX-EW operations have been critical. We have stopped at the mine site to produce leachable material, but the area where you collect the material for operating the SX-EW plant is producing the pregnant liquid solution that you have to either store or process, and storing has a certain limiting capacity. So eventually, you have to keep producing to maintain a certain level of operation. In Mexico, we have diminished at the mine site all operations related to stripping and leachable material, producing it in a very limited fashion for mineral intended for the concentrators. The deferral for stripping in the second quarter is something we are managing, and frankly, we are postponing certain maintenance and jobs at the mine, as well as in the metallurgical facility since we're operating with much less workforce than normal. Consequently, we’ll have to consider, at some point, if we cannot perform the necessary maintenance jobs, to either reduce the operational level or shut down certain equipment requiring maintenance in the upcoming weeks. We don’t currently have a defined cost on that, but we do know it will require a special effort in the second half of the year or second quarter if available to do a catch-up. As part of our current plan, after the emergency has passed, we will consider, for instance, the rental of additional equipment to expedite catch-up operations for activities like stripping or leaching material moving at the mine. At the concentrator, it's mainly maintenance that was postponed, although in some cases, we advanced maintenance tasks in the first quarter knowing we might face difficulties in the weeks following the initial outbreak of COVID-19. Thus far, I can’t provide a specific figure on those costs, but we know it will require an extra effort, and we will provide further details once we have a clearer situation, which we believe will be by the end of the second quarter.

Thank you.

Thank you. Our next question comes from Timna Tanners with the Bank of America. Please go ahead.

Hey, good morning. Thanks for the details. I know last conference call you provided updated thoughts on your long-term CapEx budget. I was wondering if you could review any changes to that in the near term? And I also know you went through the projects, but I don't think I caught if there are any changes to the timing of completion of those projects. Can you remind us, please?

Yeah, Timna. Thank you for your question. At this point, we haven't made any changes to our capital goals. As you pointed out, we made a significant adjustment, a reduction in our capital budget when we reported the end of 2019 in February. Currently, we have made a further reduction in our capital expenditures for this year. 2020 shows reductions: $38.6 million for 2020, $132.8 million for 2021, and total reductions over the next five years amount to about $367.5 million. The cost reduction in CapEx resulted from postponing some minor projects at the Toquepala operations. We have also postponed the construction of a new smelter in Peru that required certain investments in the short term.

Okay. Thank you. I was just wondering if you could provide any framework for how to think about the decision regarding the dividend. How much does the board take into consideration the copper price or the importance of sustaining capital expenditures, or is it a combination of both? Or is it based on a given free cash flow level that they consider or any other color would be great.

Well, if you look at the results for the first quarter and how we have been approaching dividend approvals, the board approved dividends of $0.40 per share in each of the quarters through 2018, even though there were points when prices were lower than what we experienced at the end of 2010. I mentioned that we're a little bit north of $2.80 at this time. Today’s prices would indicate that the company could maintain the $0.40 dividend; however, the board decided to be more cautious due to the lack of clarity regarding the supply and demand balance in the upcoming months for copper. Even though we feel very comfortable with cash costs, projected around $0.77 per pound which places us at the low-cost level of the first quartile, we decided to slow down dividend distributions to see with better clarity in the forthcoming periods. In the second quarter, we paid a debt of $400 million on bonds on April 16. As a company, while our cash position remains solid, we think it’s prudent to maintain a cautious perspective on liquidity until we see a more favorable outlook.

Okay. Thank you and best of health, Raul.

Thank you.

Thank you. Our next question comes from John Brandt with HSBC. Please go ahead.

Hi, good morning, Raul. Thanks for taking my questions. First, I wanted to ask you about demand. Are customers continuing to take their contracted volumes? Are you seeing any deferrals of volumes, or are you still able to sell everything you can produce? Also, are you having any issues logistically getting it from Peru and Mexico to the clients? And secondly, could you comment on any supply chain issues for your current operations? Are you seeing delays in getting equipment or contractors' works? I am trying to understand the likelihood of potential project pushbacks due to the COVID outbreak. Thank you.

Sure. Thank you for your question, John. We are selling all the material we’re producing. Transportation has been a bit more complicated, particularly during the first week of April and at the end of March when there were logistics issues not only on our ports but also on our clients' ports where operations were restricted or had less workforce. Fortunately, we have managed to maintain our shipments without significant problems. When we had the financial crisis back in 2008 and 2009, we sold all the copper that we produced at that time, even though demand dropped by about 7%, and similarly, we haven’t encountered sales issues this time. Regarding supply chain, initially, we faced challenges as some key suppliers decided to shut down their facilities, for example, an exclusive factory in Peru which was crucial for us. Also, obtaining lime was difficult for our smelting operations at the start. However, these problems were fixed and we are currently being supplied at a reasonable level despite working with slightly less inventory of some key inputs. Concerning projects, some activities cannot be conducted at this point because they require travel or site visits that are limited during this time. While some companies are cancelling their purchases and freeing up equipment in the process, we expect to move ahead in the waiting line for this equipment. Thus, it has varying impacts on our operations.

That's great. Thank you very much.

Thank you. Our next question is from Hernan Kisluk with MetLife. Please go ahead.

Hello, good morning. Thank you for the presentation. I have two quick questions. The first one is if you could provide a breakdown of variable versus fixed costs included in your cash cost? And the second one is if you have any committed credit facilities available?

I’m sorry, I couldn't catch what you were saying in the second question.

If you have any committed credit facilities?

Okay, sure. Last year we issued a $1 billion bond at a base interest rate of 4.5%. Currently, we don’t see any need to enter the financial market, as we are cash flow positive. Therefore, we have no specific revolving facilities in place. Now, regarding variable versus fixed costs, about 30% of our costs are fixed. The mining operations are probably more like a 25% fixed cost, while the metallurgical facilities are a little bit more than 30%. We have some extra room if we had to reduce production, but it’s important to note that all of our facilities are highly competitive cost-wise. The cash costs reflect that condition and are relatively similar across our major operations.

Okay. Thank you very much.

Thank you. Our next question is from Andreas Bokkenheuser with UBS. Please go ahead.

Thank you very much. Just a quick question for me. How do you think about the current oil price? Although I believe it would benefit your fuel costs, lower costs going into the second quarter, may offset the copper price we're seeing at the moment. Is there anything else that should be considered in your operations concerning the low oil price? This is my question. Thank you very much.

Sure. Oil represented 14% of our operating costs last year, while in the last quarter, it represented 12.7% of our operating costs. So obviously, its reduction will ease total costs, which helps balance any reductions in copper prices along with foreign exchange impacts. As I reported in our review of costs, we experienced a decrease by about $35 million in our operating costs due to exchange rate adjustments in the first quarter. This has been especially prominent in Mexico, where the devaluation of the Peso has been slightly over 25%, compared to Peru where the depreciation of the Sol has been about 4%. It's noteworthy that our net earnings were also impacted by a higher effective tax rate in the first quarter of 2020 due to local financial tax payments in Mexico and Peru related to exchange gain variances, which according to local tax laws, generates certain tax profits.

So we can assume that you're not hedging your oil exposure in any material ways. Is that fair to assume?

Right now, we haven't indicated any plans to hedge and are evaluating the matter but haven’t made any decisions.

Okay. That's very clear. Thank you very much.

You’re welcome.

Thank you so much. And our next question is from Thiago Lofiego with Bradesco BBI. Please go ahead. Thiago, your line is open.

Hi, I'm sorry, I was on mute. Can you hear me now?

Yes.

Okay, great. So just two quick questions. One is on the average capacity utilization you're running right now. You mentioned you're running at around 90% in Peru, if I'm not mistaken. Did you provide that number for Mexico as well? And the second question is are there rules regarding operations in different regions of Mexico and Peru concerning the shutdown or reductions in operations and utilization rates for mining operations? Do you see risks of further reductions in production in any regions or mines, and when do you expect to return to 100% utilization in both countries?

Let me start with that. Once we can operate normally without restrictions outlined during the emergency period, we will need to look at how we catch up on certain maintenance work and tasks that have been postponed. This will take some time. We believe we'll be able to navigate through this situation in the second quarter of this year and aim to return to full capacity as soon as possible. In Peru, we are indeed operating over 90% capacity for production. In Mexico, the capacity utilization isn't as high. The SX-EW facility is fully operational at the Mexican operations. We are focusing on critical activities to ensure the production of minerals. We've implemented measures to keep tailings and water used at our facilities in check to avoid environmental concerns and ensure everything is running smoothly during this period. So, we are managing as best we can given existing circumstances and will aim for higher operational levels in both regions as the situation allows.

So would you assume that the return to 100% utilization will likely happen in the third quarter?

That's a fair assumption.

Could you provide a rough estimate of where your capacity utilization in Mexico stands right now? Is it at 60%, 50%, or 70%?

We are operating at the SX-EW plants with a higher capacity than traditional mining due to the nature of these technologies. We're focused on producing minerals to maintain our production levels in line with our original plan, estimating a decrease of about 5% to 6%.

Thank you. Our next question comes from Management. Please go ahead.

Good morning. Thank you for doing the call. I wasn't clear on the prior discussion regarding capacity utilization in Mexico compared to Peru, if you could clarify please. My second question is about liquidity as it seems like subsequent lead to the end of the third quarter you paid the $400 million bonds. I’m curious about your cash position post that payment and if you are comfortable with your liquidity position after paying this debt? Thank you.

Yes. We paid, as you’ve seen our cash position at the end of March, it was close to $2.1 billion in cash before paying $400 million towards debt in April. Doing the simple arithmetic, our cash position is only slightly impacted post-payment, maintaining a value around $1.7 billion.

Thank you. Just to recap on capacity utilization in Mexico, I didn't catch that earlier.

In Mexico, we are operating at the SX-EW plants with higher capacities than the traditional mining operations based on the nature of the technology; we are concentrating on critical activities and covering those to ensure smooth operational flow. The context also reflects necessary index of reserve project management in fulfilling operations up to regular capacities.

Thank you. Our next question comes from Lucas Yang with JPMorgan. Please go ahead.

Hi, my questions were already answered. Thank you very much.

Thank you. Our next question comes from Alex Hacking with Citi. Please go ahead.

Yeah. Good morning, Raul. Thanks for the call, and I hope you're doing well. Just a couple of follow-ups. Firstly, on net debt, the company has been holding net debt around $5 billion for the last few years. Are you still comfortable with that level? And then secondly, regarding supply chains, could you give us some insight as to when you start reaching critical levels of key supplies if restrictions are lifted? Are you down to a few days or weeks, or can you continue for longer?

On net debt, we believe we’re in a comfortable position. This is something we continuously assess. Following our $1 billion issuance last year for financing projects in Mexico, we feel secure with where we stand. Regarding supply chain issues, we had some challenges earlier when key suppliers shut down their operations, but we managed to address those issues, and our suppliers agreed to resume their operations. For now, we are reasonably supplied with key materials, and as the Peruvian government has announced a second stage for the emergency situation, we anticipate mining activities will also be considered for gradual reopening in the following days.

Great, thanks. Take care.

You're welcome, Alex. Good to talk to you.

Thank you so much. Our next question is from John Tumazos with John Tumazos Very Independent Research. Please go ahead.

Thank you very much. In the first quarter, the mine output averaged 80 to 81,000 tons a month. In the current last April, do you think the mine output will be closer to 50,000 tons, 60,000 tons, or 70,000 tons?

Well, it depends on how we are performing with our operations at this point. We expect it to be slightly higher than 70,000 tons, with significant contributions from our Peruvian operations.

Thank you. Our next question is from Carlos de Alba with Morgan Stanley.

Thank you very much. Can you hear me well, Raul?

Yes. Go ahead, Carlos.

I know there are uncertain times, but could you comment on how you see production, copper production, and CapEx in the next few years and if that has changed given the circumstances surrounding the virus? Thank you.

Basically, we're maintaining our production outlook where the fact that our Peruvian operations are nearly at full capacity is encouraging, as we are meeting production levels while the Mexican facilities are catching up. We are confident we can overcome the current challenges through the second quarter of this year. For this year, we expect to produce approximately 995,000 tons of copper, a figure we aim to maintain, followed by expectations for modest variations in upcoming years.

So just to clarify, you don't expect the current deferral of stripping in Peru and maybe in Mexico to significantly impact your production, as you expect to catch up during the year and maintain relatively flat versus prior production guidance, right?

Indeed, we expect a catch-up plan will help mitigate any impact from the deferrals. We are looking into options to resume the necessary work, as well as outfitting additional equipment for catch-up operations.

Okay. Thank you.

Thank you. Raul, I am not showing any further questions from the queue. I’ll pass it back to you for any final remarks or thoughts.

Thank you very much. With this, we conclude our conference call for Southern Copper's first quarter of 2020. We certainly appreciate your participation and hope to have you back with us when we report the second quarter. Thank you very much. Have a nice day.

And with that, ladies and gentlemen, we thank you for participating in today's program, and you may now disconnect. Have a wonderful day.