Southern Copper Corp/ Q1 FY2021 Earnings Call

Good morning, and welcome to the 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, do 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.

Thank you very much. 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 Gonzalez 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 on 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 event gives us and 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 over 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's 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, the COMEX warehouse in 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 intelligence 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 average $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 byproduct. 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. We find 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 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 Potosí 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 byproducts, we reported higher sales of molybdenum by 34.6% mainly due to better prices. Prices increased by 17.1% for molybdenum. And we have for open sales and adjustment 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 increasing 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 costs, 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 increasing due to temporary gas shortage that we have 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 byproduct 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 byproduct credit 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 byproducts, 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 have 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 patients 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 project. 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 scale. In the first quarter of 2021, we spent $232.6 million on capital investments, which represented a 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 million 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, health care and productive development to improve the quality of life in the region. We have also promoted agricultural and livestock activity in the Tambo Valley and supported growth in manufacturing, fishing and tourism in Islay. On January 7, 2021, this past quarter, the mayor of 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, tests, oxygen, personal protection equipment and food 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 Tia Maria's construction phase. When operating, we expect Tia Maria to directly employ 600 workers and indirectly provide jobs for another 4,200. Additionally, from day one 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 Tia Maria will generate for Peru's economy and consequently, take the necessary steps to provide Southern Copper with adequate support to initiate construction. For our Mexican projects. In Buenavista, we have a new concentrator to produce the zinc concentrate. Buenavista is our operation in Sonora state in Mexico. This project includes the development of a new concentrator to produce approximately 100,000 tons of zinc and 20,000 tons of copper per year. We have completed the basic engineering study and the detailed engineering study is 89% complete. In order to continue with the project, stronger preventive measures to combat COVID-19 have been put in place. Purchase orders have been placed for major equipment. As part of this process, the mill manufacturing process has been completed, and the respective elements are being shipped or are already at the project site. The project has all the necessary permits and the capital budget is $413 million. We expect to initiate operations in 2023. When completed, this new facility will double the company's zinc production capacity and provide 490 direct jobs and 1,470 indirect jobs. For the Pilares project, also in Sonora state of Mexico, this is a project that is located 6 kilometers from La Caridad. It consists of an open-pit mine operation with an annual production capacity of 35,000 tons of copper in concentrate. A new 25-meter wide off-road facility for mining trucks has been built and will be used to transport the ore from the pit with primary crushers at the La Caridad copper concentrate. This project will significantly improve the overall mineral ore grade, combining 0.78% expected ore from Pilares with the 0.34% ore from La Caridad. The budget for Pilares is $159 million, and we expect the project to begin production in the first quarter of next year. El Pilar is a low-capital intensity copper greenfield project, which is strategically located in Sonora, Mexico at about 45 kilometers from our Buenavista mine. Its copper oxide mineralization contains estimated proven and probable reserves of 281 million tons of ore with an average copper grade of 0.301%. We anticipate that El Pilar will operate as a conventional open pit mine with an annual production capacity of 36,000 tons of copper cathodes. This operation will use highly cost-efficient and environmentally friendly SX-EW technology. The budget for El Pilar is $310 million. We expect the project to start production in 2023, and the mine life is expected to be 13 years. The results from the experimental pads in the leaching process have confirmed adequate levels of copper recovery. The company has started the project basic engineering and site species collection. For El Arco, a project that is located at the Baja California peninsula, this is a world-class copper deposit, which is located in the central part of the Baja California peninsula. It has ore reserves of over 2.4 billion tons with an ore grade of 0.422%. And to that, we have 0.3 billion tons of leach material with an ore grade of 0.288%. And as a byproduct, the mineral contains 0.11 grams of gold per ton. The project considers the construction of an open-pit mine combining concentrator and SX-EW operations. The annual production is expected to be 190,000 tons of copper and 105,000 ounces of gold with an estimated capital budget of $2.9 billion. The company has started the baseline study and is reviewing the basic engineering analysis to request an environmental impact permit. We have had the corresponding mining concessions for several years now. And during 2020, we finished acquiring all the land needed. You may have noticed that we have added a new section to our press release, which tackles the matters of the issues of environmental, social and governance investments or ESG. Southern Copper is committed to improving its ESG record by adopting best practices and communicating to the investment community and other stakeholders our progress in these matters. In this regard, the company's sustainable development policies were recently updated. These policies are applicable to SCC and its subsidiaries and formalize the company's vision, commitment and objective to promote sustainable development and generate share value for our stakeholders. In 2020, and for the second consecutive year, Southern Copper was listed on the S&P Dow Jones Sustainability Index MILA. Additionally, our score on S&P Global Annual Sustainability Assessment increased to 50 points during the same period. This represents a 5-point increase over the 2019 level. In Peru, Southern Copper is coordinating with the Peruvian government and our main oxygen supplier to adapt, which has already been done, our Ilo Oxygen Plant number 2 in record time to produce 140 tons per week of liquid oxygen. What we have done is worked together with the Peruvian government and our main industrial oxygen supplier to adjust our one of our oxygen plants to produce liquid oxygen. Plant number 1 has already been adapted in the past, and it's been producing oxygen, but given the need for this element to fight the COVID pandemic, the company decided to move forward with this investment. The production is being used to supply hospitals and medical facilities in Peru's central and southern regions, where medicinal oxygen is extremely scarce. The company has committed to donate 2,500 tons of liquid oxygen, which is equivalent to 194,000 oxygen tanks of 10 cubic meters each. As of March 31, we have delivered 1,346 tons of liquid oxygen or 53% of the committed donation. In addition to this effort, in March, we donated 2 mobile oxygen plants each with a capacity of 720 cubic meters per day of medical oxygen. These plants will be transported to towns that lack sufficient oxygen supply to fight against COVID-19. Last year, 3,667 students from 11 educational centers sponsored by the company in Mexico and Peru were able to continue their school programs remotely. To cope with the global pandemic, the company's programs, which are developed under the community development model, migrated to virtual platforms. Last year, 4,634 online workshops were held, consolidating a community of over 290,000 users on social networks, which represents an increase of 63% compared to 2019. In the first quarter of this year, we continue to roll out remote school programs to provide education to 3,756 school-age students. Alongside these efforts, Southern Copper offered virtual workshops to the community, which has been reproduced more than 10 million times since the beginning of the pandemic. Last year was marked by a good performance in terms of educational safety since no fatalities were registered and accident rates and lost days in the mining division dropped by 44% and 78%, respectively, compared to 2019. Minera Mexico obtained for the second consecutive year, 3 of the 6 distinctions, or Casco de Plata, award by the Mining Chamber of Mexico for occupational health and safety performance. The survey conducted by the Mining Chamber of Mexico, which determines award recipients includes approximately 120 mining companies of different sizes that are grouped into diverse categories, such as open and underground mining, smelting and refining. Regarding dividends, as you know, it is the company's policy to review the company's cash position, expected cash flow generation from operations, capital investment plans and other financial needs at each Board meeting to determine the appropriate quarterly dividend. Accordingly, as announced to the market on April 22, the Board of Directors authorized a cash dividend of $0.70 per share of common stock payable on May 25 to shareholders of record at the close of business on May 11, 2021. With this in mind, ladies and gentlemen, thank you very much for joining us, and we would like now to open up the phone for questions.

And our first question comes from Timna Tanners from Bank of America.

Hope you are doing well. I wanted to ask a little bit more about how to think about the upcoming quarters. In particular, if we look at the run rate in the first quarter for copper volumes are ahead of your annual guidance, but silver is below. And in CapEx, you're below. So just any update on how you're thinking about the progress for the year would be great.

Thank you very much for your question, Timna. Basically, we're maintaining our forecast. Even though we believe that in production it may be a little bit higher than what we forecast. At the beginning of the year, we mentioned that we're expecting to produce 943,000 tons of copper. At this point, the number looks more like 950,000 tons, but we're still keeping our initial forecast to see how we evolve in that regard through the year. Regarding our CapEx, we're also maintaining our budget. Please keep in mind that we will be doing some catch-up of work that we couldn't have done through 2020, and that will certainly require some more activity in that regard. Our current forecast is the same that we had at the beginning of the year, which considers $1.4 billion of capital expenditures for this year, for 2021.

Okay. So CapEx can ramp up, it sounds like and some catch-up is implied in there. Is that right?

Yes. Let me explain why our capital expenditures are currently slower than expected. Typically, we begin new projects at the start of the year once the budget is approved, and we tend to accelerate spending in the second half of the year. Therefore, we feel confident about maintaining our current capital budget for this year.

Okay. And if I could, one more. On the cost side, we've been hearing from many of the miners that higher prices lead to higher costs, which makes a lot of sense. You talked a little bit about factors to think about from Q4 to Q1. But if you could help also talk to us about what to expect in coming quarters. Freight costs are higher, higher copper prices, higher costs. But are there other factors that we should be mindful of, like any change in COVID measures may be coming off or other inflationary measures that we should follow?

Fuel prices are currently higher than they were at this time last year. In the first quarter, we experienced a one-time event with a shortage and significantly higher prices for natural gas, but that situation has passed. We are not currently seeing any appreciable impact from exchange rate changes in Mexico and Peru that would affect our costs. While you mentioned higher prices that could lead to increased material costs in the future, other than the fuel situation, we aren't observing any significant cost pressures at this time. Additionally, let me address your question, Timna. Our cash cost before byproduct credit has increased slightly to $0.074 compared to the fourth quarter of last year. This is primarily due to catch-up maintenance and stripping work that had been postponed at the beginning of 2020 due to the COVID pandemic. Initially, we were operating with about 40% of our workforce, but we are now close to operating at 90% of our total workforce. We are currently focusing on catching up with the maintenance and other work scheduled for 2020, which accounts for the rise in our cash costs before byproduct credits. On a positive note, we are benefiting from favorable prices for our byproducts, as well as copper prices, which are positively influencing our cash costs this year.

Our next question comes from Thiago Lofiego from Bradesco BBI.

I have two questions. Raul, could you elaborate on Tia Maria? Are discussions completely halted ahead of the elections? Additionally, what is the timeline for other major projects like Michiquillay and Los Chancas? Is there a way to accelerate those? What could be the earliest start dates for those projects? My second question concerns the regulatory risk in Mexico. How do you view that risk right now? Is there a possibility of increased royalties, changes in concessions, or any other regulatory risks you are observing? Or is the situation relatively stable?

Let me address the second part of your question first. At this moment, we do not perceive any regulatory risks. As you may have observed, at the beginning of the current administration in Mexico, there were concerns regarding potential increases in taxation or regulatory issues. However, we haven't seen these concerns materialize in a way that affects our industry, and we feel comfortable with the current situation. Regarding our large projects, starting with Tia Maria, we are collaborating effectively with civil society, the local population, and authorities. This collaboration has been acknowledged by the Mayor of the province of Michiquillay for the company's contributions during the pandemic, which is a positive recognition we received earlier this year. This reflects the progress we have made with Tia Maria. As for our other projects, they require time. For Michiquillay, we are nearing the signing of a new agreement with local communities to begin exploration. We also need to complete an environmental study that we submitted to Peruvian authorities in February of this year. We anticipate receiving feedback and hopefully approval for this study in a little over two months, which may allow us to accelerate the project if possible. However, we are currently sticking to our forecast for Michiquillay. For Los Chancas, we are currently finalizing the environmental impact assessment and have made good progress. Overall, we are fairly comfortable with how things are progressing for Los Chancas. I believe I've covered our three major projects, and we do not anticipate changing the start-up dates. Tia Maria is expected to begin production in 2024, Los Chancas in 2027, and Michiquillay in 2028. If we find opportunities to expedite these projects, we will take them. Our primary focus remains on achieving the best project designs to ensure a competitive operation, which we view as crucial for delivering strong results to our investors and shareholders.

And just a quick follow-up. El Arco would be then after those 3, right?

El Arco is expected to begin production in 2028, alongside Michiquillay. I didn't comment on the Mexican project earlier, so let me clarify that. I thought you were referring to the projects in Peru, but for El Arco, we anticipate starting production by 2028. As we have reported, we have secured all the necessary land and completed that process. We also have all the required concessions, allowing us to proceed with the project now from a much more favorable position than before. For Pilares, we expect to begin in 2022, and for El Pilar, in 2023.

Yes. And very final question here, Raul. When you think about Los Chancas, for example, which is the first project, this considering Tia Maria to start up in the future, the first big project, right, which you mentioned 2027 start-up. What's holding you back from really accelerating that project, for example? I understand you mentioned you guys are studying and making sure you have the best project. But it's 6 years from here into 2027, right? I would imagine that there is room for you guys. If you want to accelerate maybe a couple of years, you could, right? Or is there something really that would make this impossible to happen?

Certain work needs to be completed before the land for the trains and other facilities can be prepared, which will take some time. This is the reason for the longer timeline. There are actions we can take, depending on industry conditions, such as speeding up the delivery of essential equipment or requesting that it be built and delivered to us sooner. For example, having the mills for the concentrator ready for installation could save us time. However, our current forecast remains as I previously mentioned, and we will update you if we find opportunities to shorten the timeline as we progress. It's important to note that the company is very meticulous in developing capital budgets, ensuring they are both accurate in costs and aligned with the expected timeline. When we start a project, we are committed to adhering to both the timeline and the budget. This discipline is reflected in our track record, as we have consistently met the budgets for the projects we have announced during the construction phase.

Our next question comes from Carlos De Alba from Morgan Stanley.

I hope you and your families are doing well. I have a few questions. The first one is about cash costs before byproducts. When you mentioned the increase quarter-on-quarter, it seemed better than I expected and possibly better than the guidance for the year. Could you elaborate on how sustainable this level of cash costs is? Also, is there any update to the guidance for the year regarding cash costs before byproducts?

Well, we expect to have our cash cost, that's about where we are now. We think that, as I say, we're catching up with certain works, and we have an unexpected event regarding the gas prices and cost and availability in the first quarter. So that should be removed from now on, that spike in gas prices. And then for the rest of the year, let's say that we're going to focus to have before byproduct credits between $1.50 and $1.55. And well, byproducts will certainly help, given the better prices that they are that we're seeing in that regard and the stronger production that we're getting from our molybdenum plants. And also, we expect to have a better zinc production for the rest of the year as we recuperate our zinc refinery and initiate sales of refined zinc for the rest of 2021.

Yes. That was my second question. How do you see that recovery? Do you expect refined zinc production and shipments sales to recover already in the second quarter after the fire? I mean, what is the progress that you have made in the period of damage done to the refinery?

During the first quarter, we experienced a fire that impacted our facilities. We have mostly repaired the damage, but we were unable to produce the forms necessary for selling refined zinc. This is what we have been focusing on throughout the quarter. We expect to start production soon. As you may remember, we have ample refining capacity at our zinc operations, so we have zinc concentrate that will be processed in the second quarter and throughout the rest of the year, which will help us catch up on refined zinc sales for this year.

All right. Excellent. I have two more questions. First, regarding capital allocation. Southern Copper clearly has high-quality assets in copper, and its cash generation is impressive. However, while the company currently pays dividends, there isn’t a specific capital allocation policy, unlike other mining companies that have recently developed policies for materials like aluminum and iron ore. Can we expect Southern Copper to establish a more formal allocation policy for its excess cash generation? My second question is whether the company has analyzed the potential copper demand resulting from the U.S. infrastructure package that was mentioned earlier in the call.

Thank you for your questions, Carlos. Regarding our capital allocation policy, that is something we may consider in the future. However, our track record is quite clear. We are focused on developing projects that will maintain our status as a low-cost copper producer, likely the lowest among our peers based on the size of our company. We believe we currently have the lowest cash cost of copper production. Concerning dividends, the company is not retaining cash. Our Board has been increasing our quarterly dividend as we transition through a different phase of the price cycle and as our production grows. To provide some context, about ten years ago, we produced less than 500,000 tons of copper, and now we are at approximately 1 million tons. We have doubled our capacity and aim to reach 1.8 million tons of copper production in this decade while maintaining our low-cost production characteristics. As for the last question, we do not have a formal internal estimate regarding the impact of the green revolution or the U.S. infrastructure package on copper demand. While our commercial team is optimistic and there are forecasts suggesting favorable outcomes for copper producers in the coming years, we do not have a formal estimate at this time.

Our next question comes from Rodrigo Salazar from AM Advisors.

My question has been answered.

Our next question comes from Ivan Fernandez from Kinea.

I have a question about the political risk in Peru. I wonder how you're seeing the guy, Castillo, and his proposals, particularly on risks related to the nationalization or expropriation of mining operations or excessive taxation of mining operations or even potentially less government protection against protests that could affect operations. If you could comment on kind of defenses you might have against that in case it pushes forward that kind of proposition, or even more useful would be to hear your views on what he's actually likely to try to do if he wins, whether it's just campaign rhetoric or you really believe he would push for these kinds of things. It would be very helpful to understand the risks you see for the company around that.

Thank you for your question, Ivan. At this time, we prefer not to comment on the candidates' proposals related to the mining industry because we have observed that positions can change as campaigns progress. In the past, we've seen this happen. We believe that once the elected president addresses issues related to our industry, he or she will recognize that we are a key partner in Peru's development and an important driver for the country to recover from the severe recession caused by COVID-19. Therefore, we are not making any specific comments on this matter right now. Once there is a clear direction, we will discuss any specific measures that may be announced by the elected president.

Our next question comes from Leopoldo Silva from LarrainVial.

So my question is regarding your smelters projects. Here, could you please share with us some of the recent developments you have had on these projects in Ilo, in Peru, Empalme and Mexico? On what stage are they currently?

Yes. We have two smelting projects, one in Peru and the other in Mexico. Let me start with the project in Mexico. We plan to begin these investments later this decade. Currently, we are conducting studies related to this project, but it is not a specific priority in our future expenditures. Regarding the project in Peru, we have already reviewed the economics. There is a promising concentrate market in the northern part of Chile and southern Peru, and we are considering investing in a new smelter there as well. We have completed the review of the technology and its economic results, which indicate that it could be a strong investment for the company. However, this has not yet been approved by our Board, and we will need to seek formal approval from them. Additionally, we must initiate all necessary environmental permits for this project. We are contemplating some investments this year related to cogeneration of power at the Ilo smelter. From 2022 onward, we will evaluate the total budget for projects. For the smelter in Mexico, we are conducting technical studies this year, and we will consider investments in that project for 2022. There is also a strong and attractive market for concentrates in the northern part of Mexico, not only because we are well-positioned with concentrates in both Mexico and Peru but also because there are good opportunities to create value through smelting in both countries.

Great. Could you guide us through breaking down the strategic value of this investment on one hand, in terms of the returns of the stand-alone business, and how that aligns with being the lowest cost producer? On the other hand, how much do miners value having smelting capacity on this side of the Pacific, as well as securing sulfuric acid supply from the smelters? Is there a hidden value in having the smelters located on this side of the Pacific?

Well, certainly, there is always the possibility of saving all the freight that will take the same, say, concentrates from the northern part of Chile, the southern part of Peru to China and the same applies to Mexico. There are U.S. copper concentrates that could go to these smelters as well as our own production that we have from the Buenavista operation at this point. On the budget, the smelter in Mexico has an estimated budget of $864 million. And for the Peruvian one, it's $1,357 million. Those are the budgets. Please keep in mind that these 2 have not been approved by our Board. So they are still under review, technical studies, and we don't have a specific goal for them, but it's in our current outlook for the future.

Our next question comes from Andreas Bokkenheuser from UBS.

I have two quick questions, one following up and the other regarding last year's volumes. Notably, copper production in Peru declined due to COVID-19 and mining shutdowns, but you managed to increase your production year-over-year. Can you explain how you achieved this growth despite the challenging market? Additionally, what differentiates your production from those producers who are struggling? For my second question, regarding the risk in Peru, I understand you don't want to comment on current candidates. However, hypothetically, what would be necessary to start nationalizing mining assets in Peru? From my discussions over the past month, it seems it would require constitutional changes. Can you confirm this and provide any insight on what would actually be needed?

Thank you very much for your questions, Andreas. In 2019, we started producing at the second concentrator of Toquepala, which has a capacity of 100,000 tons of copper per year. We had eight months of production that year. In 2020, the facility operated at full capacity for the entire year. At the beginning of the pandemic, we streamlined our operations to focus solely on the concentrators, the smelter, the refinery, and the SX-EW operations. In Peru, since our operations are isolated and we had no COVID cases at the onset of the pandemic, we were authorized to continue. Most of the year, there were no COVID outbreaks at our sites where our workers and their families reside. We did have a few cases from people living outside our premises, but we managed to produce the mineral required for our concentrators. We conducted minimal stripping work at Toquepala, which allowed us to maintain production levels without any cases among our workforce on-site. We initiated production with the new concentrator in May 2019, and the full year of production explains the increase in our copper concentrate output in 2020. Regarding your question on potential expropriation of mining operations, the candidate who mentioned this has indicated they are more inclined towards changing taxation rather than nationalizing operations. Therefore, we do not believe this will become a significant issue, but we will observe how the new president implements their agenda.

Hope you guys are all safe and stay safe.

Our next question comes from Fernando Assad from Ashmore.

Congrats on the results in a very challenging environment. My question as well is hypothetical in nature. If the Peruvian political situation, whoever is in power, continues to be as much of a headwind and mix as it has been over the last 12 months, what can you do to reallocate priorities in terms of investments and perhaps production from Peru to Mexico? Or are the growth projects in Mexico totally unrelated in terms of the Peruvian projects in particular, Tia Maria. Is there any way you can put the Mexican growth projects ahead of Tia Maria?

Thank you for your question, Fernando. We have three projects currently being developed in Mexico with a combined budget of just over $900 million. Overall, these projects are progressing well, particularly Pilares, which is nearly complete. We are fine-tuning some details to start production and anticipate the potential for advancing production at Pilares. El Pilar is also moving ahead, and we are in the technical studies phase of that project, so there are no issues there. However, the zinc concentrator at Buenavista has been somewhat impacted by the pandemic. We are awaiting the final vaccination of individuals over 60 in the project's area, which we expect will signal the restart of operations at the zinc concentrator. The construction of the zinc concentrator should accelerate once the Mexican government completes its vaccination efforts in Cananea. We have reported on encouraging activities led by the Sonora government, which we view as a positive development. Our company is continuously exploring opportunities to acquire assets that align with our low-cost operational model, particularly focusing on copper, which we believe has a strong outlook over the next few years. We are primarily concentrating on that, but if conditions improve in other countries with attractive projects, our asset management will thoroughly evaluate those opportunities and make recommendations to our Board, which will ultimately decide on any related acquisitions or activities where we see potential.

And our next question comes from Alfonso Salazar from Scotiabank.

First of all, congratulations on all the COVID support initiatives of the company. I have a question regarding growth beyond the projects that you have announced.

Alfonso, I can't hear you. Could you get a little closer to your microphone, please?

Can you hear me better now?

Much better. Thank you.

I have a question about the growth potential beyond the announced projects, specifically regarding Toquepala and Buenavista. I'm setting aside the increasing risks associated with the elections in Peru for the moment. Is it feasible for Southern Copper to increase capacity at Caridad and the Cuajone agreements you mentioned, particularly the Cuajone expansion that has been discussed for many years? That's my first question. My second question is related to the mining reform in Mexico. I missed part of your comments on that, but I’ve noted that many recent reforms in Mexico, particularly those affecting natural resources like the energy and hydrocarbons reforms, are strategic in nature. Why do you think the mining industry would be exempt from such reforms?

I couldn't catch the final part of your second question.

Yes, just trying to understand why do you think that mining reform is not likely to be materialized in Mexico. I got disconnected when you were talking about that.

Let me first address your initial question regarding the increased capacity in Toquepala. Currently, we are operating at the optimal capacity for this site. It's worth noting that we essentially doubled the concentrating capacity of Toquepala in 2019, which was a significant investment, and we are pleased with that outcome. For Cuajone, we have recently reduced the daily mining rate and are exploring potential expansions to align its operations with the median level of Toquepala in Peru. Resources have been allocated to evaluate this expansion. Additionally, we are investigating ways to enhance our water recovery, as this will be a crucial step in facilitating the Cuajone expansion. This could lead to a slight increase in our production capacity in Peru. Regarding the mining reform in Mexico, we need to monitor how the political situation unfolds there. So far, since the new administration began, we haven't observed any concrete actions related to this issue.

Raul.

Yes, this is Oscar. I want to mention that there was some reform last year to the special mining tax, including changes that reduced the concession fees that could be credited to the special mining tax. The government also made adjustments to the concessions and how that special tax was paid. This has had an impact this year, resulting in an increase in the special mining tax.

Our next question comes from Jean Bruny from BBVA.

Probably just a quick one on ESG. I found it very interesting that you put a full page dedicated to that matter, to ESG. Is it something we can expect now to happen every quarter? Maybe you can develop metrics you will be using in the future in the communique? And are you considering maybe in the medium term, depending on the demand on the projects, using green bonds or sustainable bonds to finance some specific projects?

I couldn't get your question. Sorry, Jean, could you repeat it please?

Yes. I noticed that you dedicated a full page to ESG in the communique. Will this be something we can expect to see every quarter? What metrics will you be using in that section? Also, are you considering issuing green or sustainable bonds in the future?

Thank you for your questions. As highlighted in our press release, we have included a section on ESG, and this will continue in the future. Recently, we have been focused on two main initiatives. First, we conducted a gap analysis to identify what we need to improve our ESG metrics now and for the future. This is a corporate initiative that we are actively pursuing. We also believe that part of this effort involves enhancing our communication to detail the progress we are making in this area. You will see these metrics reported in the coming quarters. Additionally, green bonds are an appealing funding source for us, and we will explore them as an option when engaging with the capital markets. This is part of our strategy to communicate our initiatives and take advantage of any opportunities to enhance our ESG metrics.

Thank you. And I am showing no further questions at this time. I'd now like to turn the conference back over to management for any closing remarks.

Thank you very much. We conclude our conference call for Southern Copper's First Quarter 2021 Results. We appreciate your participation and hope to have you back with us when we report the second quarter of this year. Thank you very much and stay well, all of you. Thank you again.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and you may now disconnect. Everyone, have a wonderful day.