Southern Copper Corp/ Q2 FY2022 Earnings Call

Good morning, and welcome to Southern Copper Corporation's Second Quarter 2022 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 second quarter 2022 as well as answer any questions that you may have. The information discussed on today's call may include forward-looking statements regarding the company's results and prospects, which are subject to risks and uncertainties. Actual results may differ materially, and the company cautions not to place undue reliance on these forward-looking statements. Southern Copper Corporation undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. All results are expressed in full U.S. GAAP. Now I will pass the call on to Mr. Raul Jacob.

Thank you very much, Carmen, and good morning to everyone, and welcome to Southern Copper Corporation's Second Quarter Results Conference Call. At today's conference, I'm accompanied by Mr. Oscar Gonzalez Rocha, CEO of Southern Copper and Board Member. In today's call, we will begin with an update on our view of the copper market. We will then review Southern Copper's key results related to production, sales, operating costs, financial results, expansion projects, and ESG. After this, we will open the session for questions. Before we go into the details of the second quarter of this year, let me mention that our financial results have been impacted by some unusual circumstances. This scenario has been compounded by three major factors: increases in costs for fuel, power, and some other operating materials due to inflation; a drop in copper prices that affected results for the quarter as well as open sales through significant mark-to-market adjustments, which led sales to drop $173.5 million. Mark-to-market is our required accounting method to reflect the fair value of sales that have no final price due to quotational periods in the future time. In other words, when prices drop, we have to adjust sales that we have not collected. The value of these sales is what is reflected in our financials. As a consequence, we have this $173.5 million adjustment. Our third part is that quarterly results were also affected by a decrease of 25,624 tons in copper production at our Peruvian operations, attributable to the stoppage at Cuajone and lower ore grades. To avoid potential loss events, production losses were temporarily offset with copper purchased from third parties, albeit at a higher cost. Finally, net sales were affected by lower sales volumes due to an uptick in finished goods inventory translating into a $105.2 million sales reduction. Now, let's focus on the copper market. In the second quarter of this year, the London Metal Exchange copper price decreased 2% from an average of $4.40 per pound in 2021 to $4.32 in this quarter. However, during the month of June, we had a significant drop in copper prices down to its current level of between $3.30 and $3.40 per pound. A concern for a simultaneous recession in the U.S., Europe, and China is dominating the market and consequently affecting copper prices. These years are based upon the following impacts, the consistent increment in interest rates by the Fed, the Bank of China and other relevant central banks, the slowdown of the Chinese economy due to COVID-19 lockdowns, and a 31% reduction in construction activities year-on-year. Even though these issues concern us, we should note that the most relevant market intelligence houses for the copper market are expecting balance or a small deficit for 2022 in the copper market. This assumes that we are expecting demand to grow between 1% and 2.5% this year, particularly in terms of capital consumption in the U.S. There is uncertainty regarding future production growth in Chile and Peru, which together represent about 40% of the total copper supply. The major warehouses have not reported a relevant increase in copper inventories. Just to give you an idea, the sum of the London Metal Exchange, COMEX, Shanghai, and bonded warehouses in China, together represent, as of June 30, a low level of refined material available, only 8-days of consumption. We believe the economic slowdowns in the U.S., China, and Europe have temporarily weakened the demand for copper and are driving reductions in current prices. It is important to emphasize that copper plays a leading role in the global shift towards renewable energy, which correlates positively with our assertion that the underlying demand for copper will be strong in the long term. In this scenario, we believe the current cycle of low prices should be short-lived. Now let's look at Southern Copper's production for the past quarter. Copper represented 78% of our sales in the second quarter of 2022. Copper production registered a decrease of 12.1% in the second quarter, to stand at 208,428 tons. Our quarterly results reflect a 25.3% drop in production in Peru, which was triggered by a production loss of 9,339 tons at the Cuajone Mine. This growth was primarily attributable to a 54-day mine stoppage and a decrease in ore grades at both Toquepala and La Caridad. On a year-on-year basis, copper production fell 11.1% in 2022 to stand at 422,908 tons. Regarding the Cuajone stoppage, on April 30 of this year, the Peruvian government issued a Ministerial Resolution to set up a 3-party roundtable for dialogue with members of the community, government, and company officials to better understand all parties concerned. As of today, nine roundtable meetings and three direct meetings with this community have been held. The company has proposed plans to invest in social programs and address the needs voiced by the communities, and SCC has indicated interest in purchasing land near the Cuajone operations to establish a buffer zone to protect installations and production down the line. The company strongly believes that the program we have proposed will make meaningful and sustainable contributions to the community's progress and well-being. Each effort will be complemented by a positive impact through the Social Investment for Taxes mechanism, known in Spanish as obras por impuestos, which will allow SPCC to fund public investments in necessary public infrastructure and credit these expenditures against its taxes. For 2022, we expect to produce 898,200 tons of copper, a decrease of 3% compared to our 2022 plan of 972,000 tons. We expect our copper production to bounce back in 2023, reaching 971,000 tons of production as we get the Peruvian production back on track and generate new production through our Pilares and Buenavista zinc concentrator project. For molybdenum, it represented 8.6% of the company's sales value in the second quarter of 2022, and is currently our first byproduct. Molybdenum prices averaged $18.30 per pound in the quarter compared to $13.89 in the second quarter of 2021. This represents an increase of 31.7% in time. Molybdenum production decreased by 9.4% in the second quarter of 2022 compared to the same period of 2021. This was mainly driven by a decrease in production at the Cuajone operation. La Caridad and Toquepala mines also decreased their production due to lower ore grades mainly in the case of Cuajone, which was affected by the Cuajone stoppage. These results were partially offset by higher production at Buenavista. On a year-on-year basis, molybdenum production fell 5.4% in 2022 after production fell at Cuajone and La Caridad and was partially offset by an increase in Buenavista and Toquepala mines production. For this year, 2022, we expect to produce 25,700 tons of molybdenum. We believe that the molybdenum market prices will be supported by lower exports from China and Russia that are maintaining this market stable. For silver, it represented 4.3% of our sales value in the second quarter of 2022, with an average price of $22.65 per ounce in the quarter, a decrease of 15.4% from the second quarter of 2021 price. Silver is currently our second byproduct. Mine production decreased by 4.3% in the second quarter of this year compared to the same period of 2021 after production from Toquepala, Cuajone, and La Caridad declined. This was partially offset by an increase in production at the Inca and the Buenavista mine. Refined sugar production increased 1.1% in the second quarter of this year, mainly due to an increase in production at our La Caridad and Inca refineries. In 2022, we expect to produce 18.9 million ounces of silver, in line with our 2021 production level. Zinc represented 3.5% of our total sales value in the second quarter of 2022, with an average price of $1.78 per pound in the quarter, a 34.8% increase from the same period of 2021. Zinc mine production decreased by 11.5% quarter-on-quarter, totaling 15,141 tons. This was primarily driven by lower production at Charcas and San Martin mines. Refinined production decreased by 14.8% in the second quarter compared to the second quarter of 2021. For this year, 2022, we expect to produce 66,900 tons of zinc in line with 2021 production. Looking at our financial results. For the second quarter of 2022, sales were $2.3 billion. This is $590 million lower than sales for the second quarter of 2021 or 20.4% lower sales. Of this amount, $173.5 million are explained by the mark-to-market adjustments, 89.3% by the 9,339 tons of Cuajone production loss in the quarter, $117.8 million by lower sales due to lower ore grades at the Peruvian operations, and $105.2 million for 11,000 tons of finished products in inventory. Copper sales volume decreased by 16.3%, while value decreased by 23.4% in a scenario of lower prices, mainly as a result of the adjustment that I already mentioned and the reduction in volumes indicated. Regarding our main by-products, we had lower sales of molybdenum due to lower volume, partially compensated by better prices. In the case of silver, sales decreased due to lower prices and volume for zinc sales remained stable with the lower volume compensated by the prices. Our total operating costs and expenses increased by $276.5 million or 22.6% when compared to the second quarter of 2021. The main cost increments were in Mexican workers' participation, purchased copper, diesel and fuel expenses, and operating and repair materials. Energy has also increased slightly. These cost increases were partially compensated by lower Peruvian workers' participation, translation differences and other factors. In the second quarter of this year, adjusted EBITDA was $1,024 million, which represented a decrease of 45.2% compared to the $1,862.4 million registered in the second quarter of 2021. The adjusted EBITDA margin for the second quarter stood at 44.3% versus 64.3% in the same period of 2021. Adjusted EBITDA for the first half was $2.7 billion, 21% lower than the same mark for the first half of 2021. The adjusted EBITDA margin for the first half of 2022 stood at 53.2% versus 62.9% in the same period of 2021. Cash cost. Operating cash cost per pound of copper before the product credit was $2.15 per ton in the second quarter of 2022. This is $0.32 higher than the value for the first quarter of 2022. This 17.4% increase in operating cash cost is a result of higher cost per pound from production costs, treating and refining charges, and administrative expenses. This was partially compensated by a higher premium on refined copper. Southern Copper's operating cash cost, including the benefit of our product trade, was $1.10 per pound in the second quarter of this year. This cash cost was $0.54 higher than the cash cost of $55.5 that we had in the first quarter of this year. Regarding by-products, we had a total credit of $465.3 million or $1.05 per pound in the second quarter of 2022. These figures represent a 17.6% decrease when compared with the credit of $583.5 million or $1.275 per pound in the first quarter of this year. Net income in the second quarter of 2022 was $432.3 million, which represents a 53.7% decrease compared to the $932.7 million registered in the second quarter of 2021. The net income margin stood at 18.7% versus 32.2% in the same period of 2021. This is for the second quarter. As mentioned before, our financial results this quarter have been impacted by unusual circumstances. Nonetheless, we believe Southern Copper is well-positioned to leverage our strength in this challenging environment. Our strong financial position, low cash costs, efficient operating cost programs, and our significant copper reserves will enable us to weather both current and eventual circumstances. We remain fully committed to creating value and positive impact for our shareholders and for all the communities where we operate. Cash flow from operating activities in the first half of 2022 was $1,130.5 million, which represented a decrease of 38.7% over the $1,844.2 million posted in the first half of 2021. This effect was attributable to lower sales value and a mark-to-market adjustment already indicated. Let me add that in the first two quarters of the year, we have a structurally higher increase in working capital that reduced our cash flow available in the first half of the year. Capital investments - 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. Through the years, our strong financial discipline has consistently allowed us to make ongoing investments in our considerable asset portfolio. In 2022, we spent $224.6 million on capital investments, which reflected a 2.2% increase over the figure reported in 2021 and represented 51.9% of net income this quarter. In the first half of the year, we spent $429.7 million on capital investments, representing 35.3% of net income. Our current portfolio for approved projects in Peru totaled $2.8 billion, with $1.6 billion already invested. If we include the Michiquillay $2.5 billion project and the Los Chancas $2.6 billion projects, our total investment program in Peru reflects a commitment of $7.9 billion. For Tia Maria in Arequipa, Southern Copper has been consistently working to promote the welfare of the population of Islay province. Apart from 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 activities in the Tambo Valley and supported growth in manufacturing, fishing, and tourism in Islay. In 2021, Southern Copper fortified its relationship with the regional government and successfully overcame its opposition to project initiation. This new consensus was reflected in an agreement for social investment for taxes for projects relative to health facilities and roads. Our efforts to ensure the current and long-term welfare of the population in the area of influence of the Tia Maria project were recognized by several local associations, which sent letters to the National Government to request project initiation. 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. We will make it a priority to hire local labor to fill the 9,000 jobs that we expect to generate during the Tia Maria construction. Additionally, from day one of our operations, we will generate significant contributions to revenue in the Arequipa region. The company has made an offer to the Peruvian government to build the Paltiture dam, instead of a desalination plant originally proposed to provide water for both the project and the community. The dam will have a total capacity of 73 million cubic meters, of which the company will use a maximum of 10 million cubic meters. The remaining 63 million will be for community use. If the dam is built, it will require a much higher investment than the $100 million budget planned for the desalination plant. Nevertheless, the company believes that by increasing the water supply, it will generate more capable benefits for local communities. We expect the Peruvian government to continue to acknowledge the significant progress the project has made on the social front and the important contributions that Tia Maria will generate for Peru's economy and consequently, take the necessary steps to provide SCC with adequate support to initiate construction. Los Chancas is a greenfield project located in Apurimac, Peru. It consists of copper and molybdenum porphyry deposits. Current estimates of indicated copper mineral resources are 98 million tons of oxide with a copper content of 0.45% and 52 million tons of sulfide with a copper content of 0.59%. The Los Chancas project envisions an open-pit mine with a combined operation of concentrator and SX-EW processes to produce 130,000 tons of copper and 7,500 tons of molybdenum annually. The estimated capital investment is $2.6 billion, and the project is estimated to begin operating in 2027. In February of this year, a group of illegal miners occupied parts of the land of the project and started to produce copper using a low-scale artisanal process. In May, a group of people attacked the project mining camps, causing a fire and completely destroying installations. There were no fatalities to report. As of today, these illegal miners are still working in the zone. The company expects strong action from the authorities to restore the land to the company so that it can continue to develop the project. For the Michiquillay project, in June of 2018, Southern Copper signed a contract for the acquisition of the Michiquillay project in Cajamarca, Peru. The company has created a multi-disciplinary management team to plan the development of these projects. As part of this plan, the company has established venues of contact with the local and regional authorities and communities to promote programs for sustainable development in the area. In 2021, the company signed a social agreement with the Michiquillay and the Encañada Communities. And on October 1, 2021, the Peruvian Ministry of Energy and Mines approved the semi-detailed Environmental Impact Study for the project. Social agreements with the Michiquillay and the Encañada Communities represent an opportunity to improve the quality of life of the residents of those communities via our strong social program backed by a solid framework for technical work at the project level. At the end of June, the project has all the required permits for exploration activities. These events are important steps that will allow Southern Copper to initiate an in-depth exploration program in this quarter, the third quarter of 2022. Michiquillay is a world-class mining project with inferred mineral resources of 2,288 million tons with an estimated copper grade of 0.43%. When developed, we expect Michiquillay to produce 225,000 tons of copper per year, along with byproducts of molybdenum, gold, and silver for an initial mine life of more than 25 years and at a competitive cash cost. We estimate an investment of approximately $2.5 billion will be required and expect production to start by 2028. Michiquillay will become one of Peru's largest copper mines and will create significant business opportunities in the Cajamarca region, generate new jobs for local communities, and contribute with taxes and royalties to the local, regional, and national governments. For our Mexican projects, we have the Buenavista Zinc project, which is located within the Buenavista facility in Sonora and 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 engineering study and in order to continue with the project, stronger preventive measures to combat COVID-19 have been put in place. Procurement has progressed to 99%, and all main equipment is on site. Construction site works are in progress. The project has all the necessary permits and the capital budget is $413 million. As of June of this year, we had invested $264.9 million in this project. We expect to initiate operations in the second half of 2022. 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, this is a project located 6 kilometers from La Caridad and consists of an open-pit mine operation with an annual production capacity of 35,000 tons of copper in concentrate. A 25-meter wide off-road facility for mining trucks has been built and will be used to transport the ore from the pit to the primary crushers at the La Caridad copper concentrator. This project will significantly improve the overall mineral ore grade, combining the 0.78% expected from Pilares with the 0.34% from La Caridad. The budget for Pilares is $159 million, of which we have invested $80.9 million as of June 30, 2022. The project has obtained all permits and licenses required, and we expect to begin production in the last quarter of 2022. El Pilar is a low-capital intensity copper greenfield project strategically located in Sonora, also in Mexico. It is approximately 45 kilometers from our Buenavista mine. Its copper oxide mineralization contains estimated proven and probable reserves of 317 million tons of ore with an average copper grade of 0.249%. 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, and we expect production to begin in 2024. The mine life is estimated at 13 years. The results from experimental paths in the leaching process have confirmed adequate levels of copper recovery. Basic engineering study is finished, and the company continues developing the project and site environmental activities. El Arco is a world-class copper deposit located in the central part of the Baja California peninsula with ore reserves of over 1,230 million tons with an average ore grade of 0.40%. It has 141 million tons of leach material with an ore grade of 0.27%. The project includes an open-pit mine combining concentrator and SX-EW operations. Annual production is expected to total 190,000 tons of copper and 105,000 ounces of gold. The company has started the baseline study and is reviewing the basic engineering analysis to request the environmental impact permit. As you all know, Southern Copper is committed to improving its ESG record by adopting best practices and informing the investment community and other stakeholders about our progress in this market. In line with best practices, on July 21, our Board of Directors approved the formation of a new Sustainability Committee chaired by an independent director, actually composed of independent directors. The purpose of this committee is to support the Board of Directors of Southern Copper Corporation in developing and monitoring the company's compliance with ongoing commitment to environment, health and safety, communities, human rights, and corporate governance. This is a significant step in our pledge to a robust and strong environmental, social, and governance performance. Quoting the Chairman of our Board of Directors in the letter that contains the 2021 sustainable development report of our holding, Grupo Mexico, 'A business model focused on responsible and transparent management in social, economic, and environmental spheres are essential to guarantee sustainable development.' S&P Global has recognized our sustainability efforts by including us in a new index, S&P/Bolsa de Valores de Lima Peru General ESG, as of April of this year. This index is the first of its kind in the Peruvian market and recognizes a total of 17 companies that meet high standards for environmental, social, and governance management. In light of its improvement in the realm of ESG, SC has also upgraded the company's Sustainability Assessment, which rose from 50 out of 100 points in 2020 to 61 out of 100 points in 2021. This is a 22% increase. These results led to our inclusion in the Dow Jones Sustainability Index for the MILA region in 2019, and we have also been included in the 2022 Sustainability Yearbook. We aim to improve our sustainability management and performance to ensure that we maintain and continuously improve our sustainability ratings. Certification of our environmental and occupational health and safety management systems allows the company to reinforce a preventive culture that is aligned with best international practices. We continue to make progress in our quest to achieve ISO 45001 and 14001 certifications. During the second quarter of 2022, the Maritime Terminal of Guaymas, Mexico received ISO 45001 certification, and the Charcas unit in Mexico became the first of our underground mines to obtain ISO 14001 certification. Given the importance of water for our operations and the broader perspective of climate change, the company recently appointed a Water Resources Director at the executive level, whose main function will be to coordinate the actions needed to promote water management at all our operations and ensure our place as a responsible partner in the regional management of these available resources. SCC seeks sustainability by managing different fronts. The Metallurgical Complex in Sonora, where we smelt and refine material mined from the region, was recognized in the ranking of the 10 Best Places to Work for Women. With this recognition, this plant has consolidated its position as the employer of choice for the best professionals in the country and has strengthened an organizational culture based on safety, predictability, and employee trust. This industrial complex was also given the 2021 National Export Award in the category of large industrial exporting companies for its contribution to foreign trade and international business in the country. This distinction recognizes SCC’s responsible production of essential raw materials, environmental preservation efforts, and the economic benefits and support it provides to bolster the well-being of workers and their families. In Peru, a couple of weeks ago, the Prime Minister joined us for the inauguration of the Cularjahuira dam at a cost of $11.5 million, which was the fruit of a joint investment between the company and government authorities and the highland community of Camilaca. This project will help us strengthen our cultural activities in the province of Candarave near our Toquepala operations and will be complemented by work on a new Callazas dam at an estimated cost of $35 million, which SCC hopes to finance through the Social Investments for Taxes or obras por impuestos in Spanish. This is a mechanism that allows us to credit our taxes with investments in social infrastructure. While this process and these efforts are evolving in the context of record highs for the company's tax contributions to the regional government of Moquegua and Tacna in 2021. Regarding dividends, as you know, it is the company's policy to review our 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 July 21st, the Board of Directors authorized a cash dividend of $0.75 per share of common stock, payable on August 25 to shareholders of record at the close of business on August 11, 2022. Ladies and gentlemen, with these comments, we would like to end our presentation today. Thank you very much for joining us, and we would like now to open up the forum for questions.

Our first question is from Timna Tanners with Wolfe Research.

Thanks for the overview. I wanted to explore a little bit more the cost guidance, if you could. Obviously, some of the cost pressures in the second quarter would be attributable to Cuajone being down. So I was just wondering if you could help us think about the cadence into the third quarter and the fourth quarter from what you know today. Energy prices are probably up on average, but certainly those one-time items are coming out. So can you talk a little bit more about costs, please?

Yes. Thank you for your question, Timna. Well, as you mentioned, we were impacted by a reduction in production in the second quarter, resulting from among other reasons, mainly two factors: the Cuajone stoppage that affected the first 23 days of April, and the second factor was the lower ore grades, particularly at the Peruvian operations and a little bit in La Caridad in Mexico. The ore grade is a factor that we indicated to the market a while ago. This year, we were expecting to produce less than last year due to ore grades decaying temporarily. The unexpected factor was the Cuajone stoppage. Now Cuajone is currently working at full capacity. We have reviewed our production program for the year. We are expecting now to produce 898,000 tons of copper for the full year, and we have produced already 423,000, round numbers. So we're expecting to produce an additional 475,000 tons of copper for the remaining of 2022. This will come from different sources, but mainly, we will recover the production at the Cuajone operation. We have reviewed our operating plans, particularly at the Toquepala mine, and we're slightly improving our production for this year. With that, we expect to reach our goal of 898,000 tons. Now on cost guidance for the third and fourth quarter, I think we're all seeing that fuel prices are decreasing slowly compared to what we had in the first and particularly the second quarter. More production will allow us to distribute the fixed cost on a much lower weight per ton of copper. So we are expecting to have a better cost per pound for the second half of the year. Overall, we're expecting a cash cost by year-end of $0.86 per pound. And this is based on the improvement in production and better production overall because they have also been affected, particularly in the case of Cuajone, molybdenum and silver too.

That's helpful. If I could ask one more question before passing it off. Regarding the lower dividend, it's understandable given the changes in commodity prices and dynamics. However, in the second quarter, your total cash position decreased by about $900 million, largely due to the payout. I’m trying to understand how you plan to manage your cash position going forward. Could you clarify the amount of cash you'd prefer to keep on your balance sheet? Additionally, how do you envision your dividend policy relating to the copper price in the future?

Yes. I mentioned during the presentation that in the first and second quarter of the year, the company usually has an increase in working capital, consequently reducing our cash flow from operations. If I look at the second quarter of this year, cash from operations was $641.9 million. The expenses we have in the second quarter are typically the payment of profit sharing for the Mexican workforce and certain taxes paid in Peru. In total, this year, that amount was $255 million. On top of that, we had lower revenues due to inventory buildup of finished products that we already mentioned. So if you consider, we had about $400 million attributed to working capital in the second quarter, which obviously affected our cash position. We don't expect to have as strong a working capital impact in the third and fourth quarters as it was in the second quarter. However, we're currently in a different price environment. We believe that we will have much higher cash generation, but this will align with the new price setting that we're seeing now.

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

So just one clarification on the information you gave on cash costs, $0.86 per pound. That is after by-products; can you give us the number before by-products? And then I have a few others.

We expect to close the year with $1.92 per pound of cash cost before byproduct credits.

I have a couple of questions regarding the projects. First, regarding the Buenavista Zinc project, there has been no progress noticed last quarter, with procurement still at 99%. Can you provide more details about this? It seems like there’s still a year or more before this operation starts up. Are there any delays or factors contributing to the lack of progress? Secondly, about the Tia Maria project, it’s interesting that you've proposed to help the community by building a dam, considering the project's history. What are the necessary steps for this? What kind of feedback do you anticipate from the community or the government that could influence this operation? Lastly, concerning third-party concentrate, due to the effects of Cuajone in the first and second quarters, you needed to acquire additional concentrate. Do you foresee a significant reduction in third-party concentrate purchases in the second half of the year? If you could provide some guidance on that, it would be appreciated.

Okay. Thank you very much for your questions, Carlos. Okay. I disagree with your first statement about no progress on the Buenavista Zinc in the last quarter because we're currently working, building the plant. Once a month, we review at the management level, we review the advancement in the project. Quite clearly, we're on the civil works of the project, and we have virtually all the equipment, as you mentioned, at 99%. Some of the total engineering and more importantly, procurement is well advanced too. What we are seeing is that the project is moving forward at a good pace. We had a delay in the middle of the COVID-19 pandemic, but now it's moving forward at a very good pace. We're expecting to initiate production in the second half of next year. We will provide a more specific timeline once we approach the end of the construction phase of the project. For Tia Maria, this is a proposal that the company is making to the authorities and the community to build a dam that would provide water for the communities, much of which will be available for Tia Maria operations. We believe that circumstances are evolving very positively for Tia Maria in Arequipa and in the Islay area, which is where we're observing significant progress. We think that the national government can join this process, but we're not seeing that so far. And regarding your final point on third-party concentrate purchases, we do not expect to buy it as we have done through the second quarter and the first quarter of this year. As I mentioned, these actions were driven by the need to avoid declaring force majeure. Therefore, we sought to comply with our contracts by acquiring copper concentrates from third parties, primarily from Peru. We utilized that material for feeding our Ilo smelter and refinery to uphold our contracts while incurring higher costs. For the next quarters, we are long both in Mexico and Peru regarding copper concentrates, as we produce much more copper than our smelting and refining capacities in both regions. So we are not planning on buying significant amounts of copper from third parties at all. That should help our cost control in the second half of 2022.

All right. And just for modeling purposes then, in the first quarter of 2022, the company purchased less than 3,000 tons traded from, last year the second quarter was around 3,500, 3,600 tonnes. So is that a number that we should consider that you do on the regular course of business?

Yes. If you look at what we have acquired last year in the first half, it was 4,300 tons of copper from third parties. It's a very small amount, about 1% of our total production. We don't have to expect that we will return to purchasing copper from third parties during the following periods.

Our next question is from Fernando Assad with Ashmore.

Raul, just three clarifications, if I may. Again, continue from Carlos. The cash costs that you highlighted, $0.86 and $1.98. Is that for year-end or for the full year of '22? And do you have a figure again for 2023?

Yes, I do, Fernando. Thank you for your question. Let me be very specific. For the year, we expect to close with a cash cost of $0.86, comprised of $1.92 cash cost before credits and credits for $1.06. For next year, we’re expecting to have $1.82. Keep in mind that we will have more production coming from Pilares and Buenavista Zinc next year. Our cash cost by the end of the year will be $0.89 per pound. It will remain at about that level until the beginning of 2026 when we will see a slight increase, closer to $1, before returning to the ranges of $0.86 to $0.90 per pound as we benefit from new projects, particularly the greenfield projects, such as El Arco, Buenavista, Los Chancas, Tia Maria, and Michiquillay.

Great. And just following on from that, now that the first half is completed, do you continue to expect this lower grades temporary issue on the copper side to be a 2022 issue, and you're back to steady state in 2023?

Yes. The straight answer to your question is yes. We expect to have lower grades because we're moving into areas of the mine, particularly at the Peruvian operations, where ore grades are lower, but this will allow us to reach areas with higher ore grades next year. That's part of our mining plan that we've been following through this year. We indicated this two years ago, actually, that we anticipated a slowdown in our copper production due to lower grades. The bounce-back is expected for next year. For 2023, we should be producing 971,000 tons of copper; for 2024, 1,047,000 tons; and for 2025, 1,100,000 tons.

Okay. And final clarification. In Cuajone, we're back to full capacity; the only downtime that we had in the second quarter was actually during April, and since then, there was a ramp-up back to full capacity, with no other stoppages in May and June, correct?

That's quite correct. The stoppage was a result of the committee taking the water facilities that supply water for Cuajone. So the concentrator and the plant were not directly affected, but not having water made it impossible to operate the concentrators and other facilities. We also did some advanced maintenance in our Cuajone facilities during the first phase of the stoppage. We believe that this will help us produce a little bit more than what we expect in our original plans for the third and fourth quarters of this year. In total, in the second quarter, the Cuajone mine was stopped for 20 days, and we resumed operations at full capacity three days after that.

Our next question is from Alfonso Salazar with Scotiabank.

I have a couple of questions. The first one is a very simple one. The second one, probably not that much. The one is regarding water. And if I'm not mistaken, the Tia Maria project, something that you mentioned before is that it was really not a problem with water. There is plenty of water in the region. And if you check the World Resources Institute, that's what they say that it's not a region with any water stress problem. So what is the benefit? If there is no real water problem, what is the real benefit of having this dam, and how does this impact the sentiment of the people? The second question is regarding Sonora. That's a problem where water stress is really a big issue. So I was just wondering if you have any comments on how your operations are performing. Do you have any contingency plan in case the situation gets even worse in terms of water use in the state of Sonora? And just a follow-up on the production that you just mentioned for '23 to 2025. There is an increase in production of 130,000 tons, which projects are you including in this period from your pipeline?

Yes. Hold on a second, please. Okay. Let me start with your last question. We're considering Pilares, Buenavista Zinc, and El Pilar, as well as a partial contribution from Tia Maria, for that increase in 2025. Now, regarding your first question, let me clarify this. We, in Peru, are operating in the northern part of the Atacama Desert. So we are in an area where water is generally speaking relatively scarce. We have water scarcity concerns in certain months. That's why we're focusing on improving our water recycling and savings in our operations. However, there is enough water currently available for the Tia Maria project. Given the agricultural patterns in Islay province, which produces high-quality rice, a water-intensive crop, there are certain months where water stress does occur due to this pattern of agriculture. Thus, the dam we're proposing to the government could help alleviate this situation, providing sufficient water for both the project and other agricultural needs. Regarding Sonora, we are pursuing a high-level Water Management Director to oversee our water supply and to ensure we function cooperatively within the community. This is essential both for securing enough water for our operations and supporting regional efforts on water conservation. I appreciate your feedback on the high-level appointment. It is significant, as this effort aligns with our approach to cooperate on water management in both Sonora, where we have open-pit operations, and in southern Peru, where we have Toquepala and Cuajone operations.

We have a question from Isabella Vasconcelos with Bradesco.

I just have a couple of questions on my end. Most of them have been answered. But the first one on the pricing adjustment mechanisms that generated a negative impact in the second quarter. If you could comment on how much of the volumes were exposed to the pricing adjustments and the expectations looking ahead into the third quarter, if we should expect another hit to result given that volatility has remained high in commodity prices? And the second question, a quick one on those smelters if they have already been Board approved or not?

Okay. On the pricing adjustment, let me explain what this is. This is an accounting process that we have to follow, and it is mandated. We look at the future prices curve; and we see some of our sales, particularly from concentrates such as copper and molybdenum, which are done with collection terms in three to four months ahead. So if we sell now, in July, we have a final price for that specific shipment four months from now, let's say in October or November. Consequently, we have to make adjustments on the final price. Most of the money is collected relatively in a short time frame, but the final price is subject to changes until the last payment on the material. We look at the future prices curve and adjust the sales that are not with final prices that are originally for, as I mentioned, future positions. Generally speaking, this affects our copper concentrate sales with terms of three to four months ahead and molybdenum sales that have similar conditions. I believe we are past the worst part of it, but that is my personal view, and it does not mean that it will remain like that. It ultimately depends on how the market evolves in the next few months. On the smelters in Peru and Mexico, no, they have not been Board approved yet. The company has conducted a detailed review of the technology and we believe that there is good economic value in moving forward with these two investments. However, nothing has been approved by the Board as of yet.

Great. That's very clear. And in terms of timing for Board approval, is there any field there or not?

No. We are going to do a thorough review on the CapEx projects in the second half of this year, and we'll provide more information on that in the upcoming conference call. So far, no specific dates have been set for such investments. Lastly, regarding the CapEx review, are you only looking at the smelters or at all of the projects that are currently under review? All the projects, all the projects. We will report on that at the next conference call.

Our next question is from Enrique Braga with Morgan Stanley.

I just have a quick one. If you could repeat your production guidance estimate — your new estimates for the year?

Sure. For production, it's 898,000 tons. For cash cost, it's $0.86 per pound by year-end. $1.92 will be before credits, and credits will be for $1.06. For molybdenum, we expect 25,700 tons; for zinc, 67,000 tons; and for silver, 19 million ounces.

I'm not showing any further questions in the queue, sir. Yes, sir. You can continue with any final remarks. One moment, please. We don't have any other questions, sir.

Hello, Carmen?

Yes, sir. Thank you for joining everybody. You may now disconnect.