Southern Copper Corp/ Q2 FY2023 Earnings Call

Good morning, and welcome to Southern Copper Corporation's Second Quarter 2023 Results Conference Call. With us this morning, we have Southern Copper Corporation's Mr. Raul Jacob, Vice President, Finance, Treasurer and CFO, who will discuss the results of the company for the second quarter 2023 as well as answer any questions that you may have. The information discussed on today's call may include forward-looking statements regarding the company's results and prospects, which are subject to risks and uncertainties. Actual results may differ materially, and the company cautions not to place undue reliance on these forward-looking statements. Southern Copper Corporation undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. All results are expressed in full U.S. GAAP. Now I will pass the call to Mr. Raul Jacob.

Thank you very much. Good morning, everyone, and welcome to Southern Copper's Second Quarter of 2023 Results Conference Call. At today's conference, I'm joined by Mr. Oscar Gonzalez Rocha, CEO of Southern Copper and Board Member; as well as Mr. Leonardo Contreras, also a fellow Board Member. In today's call, we will begin with an update on our view of the copper market and then review Southern Copper's key results related to production, sales, operating cost, financial results, expansion projects and ESG. After this, we will open the session for questions. Now let us focus on the copper market. In the second quarter of this year, the London Metal Exchange copper price decreased 11% from an average of $4.32 per pound in the second quarter of 2022, down to $3.85 per pound at the close in average for the second quarter. This reflects concerns about the impact of a slowdown in the Chinese economy, a possible recession in Europe and a soft landing or minor recession in the U.S. Current prices for copper at around $3.90 per pound reflect a less optimistic market than that seen in the last few quarters. At this point, we see the following factors affecting the copper market: a reduction in global inflation, which may portend the end of the interest rate hike cycle led by the Fed and the ECB; a strong recovery of mining production in Peru, which has a 19% growth for the period January-May of this year, reducing the uncertainty about current production. Chile is still lagging with a 5% reduction in copper production for the same period. Investments for future growth are still affected by expectations of economic changes in Chile and social unrest in Peru. These two countries, as you know, represent about 40% of the global supply. The most relevant market intelligence houses for the copper market are now expecting a market in surplus of about 100,000 tons for this year. This assumes a growth in demand of about 1% this year and also about the same level for the supply. Low copper inventories is another factor affecting the copper market. As of March 31, the sum of the London Metal Exchange, the COMEX Exchange, the Shanghai warehouse and the bundled warehouses in China added up to 411,000 tons of copper in inventories. That number has dropped to about 235,000 tons. This 42% reduction in inventories represents the largest dip since 2005. It is important to emphasize that copper plays a leading role in the global shift to clean energy, which correlates positively with our assertion that the underlying demand for copper will be strong in the long term. Now let's look at Southern Copper's production for the past quarter. Copper represented 78% of our sales in the second quarter of 2023. Copper production registered a 9% increase in the second quarter in quarter-on-quarter terms to stand at 227,533 tons. Our quarterly result reflects a 20% increase in production in Peru, driven by higher recoveries, the return to full operating capacity of the Cuajone mine, and higher ore grades at Toquepala. So the return of Cuajone at full speed and higher ore grades and mineral production at Toquepala are the drivers of the growth of 20% in Peruvian production. Production at our Mexican operations increased by 3% in quarter-on-quarter terms. For 2023, we expect to produce 932,000 tons of copper, an increase of 4% over the final print of 2022. This growth will unfold as we get Peruvian production back on track and will be complemented with new production at our Mexican operations through our Pilares and Buenavista Zinc concentrator projects. Molybdenum represented 11% of the company's sales value in the second quarter of this year and is currently our first by-product. Molybdenum prices averaged $20.80 per pound in the quarter compared to $18.30 in the second quarter of last year, representing a 14% increase. Molybdenum production increased by 0.2% in the second quarter compared to the same period of 2022. This was mainly driven by an increase in production at the Cuajone, Caridad, and Buenavista mines due to higher ore grades at our Mexico operations and Cuajone's return to full operating capacity. These results were partially offset by lower production at Toquepala mine. In 2023, we expect to produce 24,200 tons of molybdenum, which represents an 8% decrease over our 2022 production level. Silver represented 4% of our sales value in the second quarter of 2023 with an average price of $24.26 per ounce in the quarter, reflecting a 7% increase. Silver is currently our second by-product. Mined silver production increased by 8% in the second quarter compared to the same period of 2022 after production rose at all our operations. Refined silver production fell by 31% quarter-on-quarter, mainly driven by a drop in production at our IMMSA and La Caridad units. In 2023, we expect to produce 20.1 million ounces of silver, an increase of 8% compared to 2022 and 6% higher than the 19 million ounces produced in 2021. Zinc represented 3% of our sales value in the second quarter of 2023 with an average price of $1.15 per pound in the quarter, representing a 35% decrease from the second quarter of 2022. Zinc is currently our third by-product. Zinc mine production increased by 14% quarter-on-quarter and totaled 17,223 tons, driven primarily by an increase in production at the Santa Barbara and Charcas mines. Refined zinc production increased by 10% in the second quarter compared to the second quarter of last year. For 2023, we expect to produce 108,000 tons of zinc, representing an 80% increase over our 2022 production level. This growth will be driven by the production and startup of the Buenavista Zinc concentrator and by the recovery at the IMMSA mines where better ore grade areas have been identified. For 2024 and onward, we expect to produce over 200,000 tons of zinc per year. Financial results for the second quarter of 2023 showed sales were $2.3 billion, almost the same as we sold in the second quarter of 2022. Copper sales volume increased by 12%, while the value decreased by 1% in a scenario of prices lower by 11%. Regarding our main by-products, we reported higher molybdenum sales that grew 28% due to better prices. Zinc sales, on the other hand, were down 22% mainly due to lower prices despite a 13% increase in zinc sales volume. Silver sales were down due to a decrease in volume, which was partially offset by better prices. Our total operating costs and expenses decreased by $98 million or 7% when compared to the second quarter of last year. The main cost reductions were reported for workers' participation, purchased copper, and other factors. These cost reductions were partially offset by higher costs for repair materials, operating materials, inventory consumption, labor costs, and operation contractors and services. It should be noted that year-to-date, we registered unit cost reductions for grinding media, explosives, and power costs. Our second quarter of 2023 EBITDA was $1,115 million, representing a 9% increase compared to the $1,021 million registered in the second quarter of last year. The EBITDA margin in the second quarter stood at 48% versus 44% in the second quarter of 2022. EBITDA in the first half of this year was $2,683 million, which is 1% lower than the same period in 2022. The EBITDA margin in the first half of this year stood at 53%, which was the same as the 2022 mark. Operating cash cost per pound of copper before by-product credits was $2.19 per pound in the second quarter of this year, which is $0.10 higher than the first quarter of this year. Even though copper production volumes increased 2% between the second and first quarters, a 5% increase in operating cash cost is attributable to higher production costs, treatment, refining charges, and lower premiums. Regarding our by-products, we had a total credit of $517 million or $1.07 per pound in the second quarter of 2023. These figures represent a 20% decrease compared to the credit of $631 million or $1.33 per pound in the first quarter of 2023. By-product volumes increased for zinc, 14%; for silver, 9%; but decreased for molybdenum by 2%. Prices have decreased for molybdenum, 35%; for zinc, 19%; and increased for silver by 8%. As a consequence, total credits have decreased for all our by-products. Southern Copper operating cash cost, including the benefit of by-product credits, was $1.12 per pound in the second quarter of this year. This cash cost was $0.36 higher than the cash cost of $0.76 registered in the first quarter of 2023. As you have noticed, we had a $0.05 increase in cash cost, a 5% increase in operating cash cost, but a significant reduction in the by-product credit, and that basically explains the main changes in the cash cost. 2023 net income stands at $547 million, which represents a 27% increase compared to the $432 million registered in the second quarter of 2022. The net income margin in the second quarter stood at 24% versus 19% in the second quarter of 2022. This increase was mainly the result of a 7% reduction in operating costs, mainly attributable to a decrease in lower third-party copper concentrate purchases. On a year-on-year basis, net income was 12% higher than in 2022 for similar reasons. SCC's second quarter of 2023 net income fell below the $813 million reported in the first quarter of 2023. This dynamic reflects significant differences in copper prices in the period-over-period comparison. In the second quarter of 2023, copper sales dropped $365 million due to lower prices. That alone represented an adjustment of $213 million. Volume decreased by 4%, so the sales volume decreased by 4%, and that's another $92 million. We had an accounting adjustment on open sales for 104,000 tons of copper that represents about $59 million. For the second half of this year, we have a very positive view on the company's sales volumes. We are expecting, looking at our current operational plans, the ramping up of the new zinc concentrator in Buenavista and the Pilares project, to produce 481,300 tons of copper, 11,400 tons of molybdenum, 76,000 tons of zinc, and 10.9 million ounces of silver. An uptick in production for copper, zinc, and silver in the second half of this year should support our sales through this period. Cash from operations. Cash flow from operating activities in the first half of this year was $1,982 million, representing a 75% increase compared to the $1,131 million posted in the same period last year. Cash flow in the first half of last year was affected by a significant reduction in working capital, attributable to the Cuajone mine stoppage. Our current capital investment program for this decade exceeds $15 billion and includes investments in the Buenavista Zinc, Pilares, El Pilar, and El Arco projects in Mexico, and in the Tia Maria, Los Chancas, and Michiquillay projects in Peru. This capital forecast includes several infrastructure investments to bolster the competitiveness of the El Arco project. Since there is a short description of our main capital projects in SCC's press release, I'm going to update new developments for each of them. For the Mexican projects, in the case of the Buenavista Zinc concentrator in Sonora, this is a project that is located within the Buenavista deposit where we have built a new concentrator. This facility has a production capacity of 100,000 tons of zinc and 20,000 tons of copper per year. The capital budget of the project is $416 million, most of which has already been invested. Progress is at 98%, and we have initiated vacuum testing at the plant and expect to initiate operations in August of this year. For the project Pilares, also in Sonora, the budget for Pilares is $176 million, of which $131 million has been invested. Pilares is currently operating and delivering copper mineral to the facilities of the La Caridad operation. In the case of El Pilar, the results from experimental pads in the leaching process have confirmed adequate levels of copper recovery. The basic engineering study has been completed, and the company continues to develop the project and engage in on-site environmental activities. Project engineering is being developed by top-tier engineering and technology firms. We expect production to begin in 2025, and mine life is estimated at 13 years. El Arco, which is a project in Baja California, the company has completed the environmental baseline study for the mine, concentrator, and industrial facilities, and will proceed to submit the Environmental Impact Statement, or MIA, to the Secretary of Environment and Natural Resources to request the respective environmental impact permits. The company is currently preparing studies for the port, power pipelines, town sites, and auxiliary facilities. For the Peruvian projects, for Tia Maria, Southern Copper has been consistently working to promote the welfare of the population of the Islay province. As part of these efforts, we have implemented successful social programs in education, healthcare, and productive development to improve the quality of life in the region. We have also promoted agricultural and livestock activities in the Tambo Valley and supported growth in manufacturing, fishing, and tourism in Islay. The Los Chancas project in the Apurimac region in Peru, as of June 30 of this year, part of the project's land continued to be occupied by illegal miners; about 75 of those individuals have irregularly registered their stakes in the Integral Registry of Mining Formalization, or REINFO. The company requested and the authority subsequently ordered that the aforementioned miners be excluded from REINFO and classified as illegal miners. The company has also filed criminal complaints and other legal remedies to physically expel the illegal miners from the project and confiscate illegally mined ore. The third project that we have in Peru is the Michiquillay project, located in the Cajamarca region. In 2023, in accordance with our social agreements with the Michiquillay and La Encañada communities, the company has hired unskilled labor and is paying for the use of surface land. We're also supporting social programs in both communities, and we continue exploration activities on this project. Currently, we have installed 10 drilling platforms. For environmental, social, and governance investments, 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 these matters. For risk prevention and management of risk, by the second quarter of the year, all of Southern Copper's operating units had achieved a milestone set in 2018 to obtain the ISO 14001 certification for environmental management and the ISO 45001 for occupational health and safety management. Our efforts to prevent environmental and security risks are supported by our ISO systems and reflect our alignment with best international practices. This represents a significant step in our quest to obtain accreditation for responsible copper production in the framework of The Copper Mark certification. We continue to make progress in the development of our Critical Risk Registry. This tool strengthens environmental and safety risk management by increasing visibility of these components at all levels of the organization. The registry creates a knowledge base for informed decision-making and ensures rigorous follow-up on controls for prevention and mitigation to avoid or respond to unwanted events. This quarter, in line with our corporate environmental policy, we formalized our protocols for sustainable water management, biodiversity, and closure of operations to establish our priorities and the means by which our operations address increasingly demanding environmental challenges. In the ambit of biodiversity, in the second quarter of this year, we reforested 464 hectares in the state of Sonora in Mexico, representing 10 times the area affected in the period. With this effort, we have successfully met an objective set two years ago to reduce our historic environmental footprint by reversing the net loss of biodiversity and achieving a net positive impact for the area. In the first half of this year, the reforested area totaled 934 hectares, which is 5.6 times the affected area year-to-date. The implementation and promotion of best practices such as these has helped Southern Copper secure and maintain a place on the S&P Peru General ESG Sustainability Index of the Lima Stock Exchange. On April 28, 2023, Grupo Mexico issued its 2022 Sustainability Development Annual Report, which includes detailed information about Southern Copper's efforts on the social, environmental, and corporate governance fronts. We are having a positive impact on the communities in which we operate. We have served more than 900 women from communities close to our operations in Southern Peru through our Community Wellbeing Program, conducting a mobile health campaign to prevent breast and uterine cancer. SCC has been recognized by the Peruvian state agency Pro Inversión for its execution of a drinking water and rural sanitation program in Poblado Yacango, district of Torata. This project, benefiting 137 families, entailed an investment of $2.8 million. Similarly, in Mexico, we invested $5.7 million this quarter to improve water distribution in Nacozari and Cananea, benefiting 53,800 residents. The Youth Orchestras promoted by Southern Copper were recognized at the Mexican Polymetallic Seminar in 2023, supporting 1,646 students in Mexico and Peru. Additionally, in collaboration with the Instituto de Cultura del Estado, we held our first exhibition of the Traveling Workshop for Documentary Film at the Cineteca in Sonora, Mexico. During this event, 17 original short films produced by some of the 747 students from communities that participated in the workshop were screened. Regarding dividends, as you know, the company's policy is 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 20, the Board of Directors authorized a cash dividend of $1 per share of common stock payable on August 23 to shareholders of record at the close of business on August 9 of this year. 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 to now open up the forum for questions.

Our first question comes from Matthew Murphy with Barclays.

Raul, thanks for your comments on the projects in the pipeline. I'm interested in Peru, your take on the situation. I guess we've seen the economy in contraction, but we've also seen a bit less disruption to the mining sector. So I guess the first part of the question is, are you seeing improvement in the mining sector's ability to operate in Peru? And the second part of that is just the implications for Tia Maria. You're still, I guess, waiting for the conditions locally and at the federal level to improve. Do you see scope for that to happen this year? And if nothing changes, could this project still be going forward in 2024?

Okay. Thank you for your question, Matt. Well, first, let me say that as a general concept, social circumstances have improved in Peru. Politically speaking, we are seeing a significant improvement. The police are doing their activities and working with the companies to solve the problems that we have that require their intervention. In other cases, like Tia Maria, we are working with the local population, and we believe that we have been making progress in this matter. Basically, we're relatively much more optimistic than we were a year ago. As I mentioned, copper production year-to-date has increased 19% in Peru. I should add that in May, the increase has been over 30%. In general terms, circumstances have improved, and we're seeing Tia Maria slowly moving forward.

One moment for our next question, please.

I just wanted to ask about cash cost guidance for 2023. What do you expect before by-products for the year?

For the second quarter, we're expecting better cash costs than what we have had in the first part of the year. The reason for that is twofold. We're seeing some cost reductions. I mentioned grinding media, explosives, and some other materials. On top of that, we have more production of copper for the second half of the year, which should improve our cost per pound before by-product credits. We also expect more credits from better volumes in the second half of the year, as I mentioned while doing the company presentation.

Okay. And just to clarify, for silver, you expect 20.1 million ounces for 2023, is that what you said?

Yes, let me repeat the volumes that I mentioned. For the second half, we're expecting to produce 481,300 tons of copper, 11,400 tons of molybdenum, 76,000 tons of zinc, and 10.9 million ounces of silver. I believe your question was specifically about silver production for the year, right?

Yes.

For the year, we're expecting 20.1 million ounces of silver.

Okay. Perfect. And last one, are you factoring in any commercial production from Buenavista Zinc for this year, or will it be coming online mainly next year?

No, we're expecting to increase our zinc production coming from the new concentrator in Buenavista for about 43,000 tons of zinc.

43,000? Okay. Perfect.

43,000, yes, which will come in with a very competitive cash cost, given the fact that the copper production of Buenavista will absorb the fixed cost. This production will basically enter our cost system at a very competitive value.

One moment for our next question, please, and it comes from the line of Arthur Biscuola with Santander.

Just a follow-up on transactions. So your guidance is to reach a total corporate position of roughly 480,000 tons in the second half. What would be the main risks for the company not to reach this guidance? What can you tell us about the innovations here? Also, what to expect in terms of third-party volumes into year-end?

I'm so sorry, Arthur, I couldn't understand the second part of your question. Could you repeat, please?

Yes, sure. I just want to know what to expect in terms of third-party volumes into year-end?

For the second half? We don't get copper. Copper purchases from third parties will be zero. We are long in copper concentrates now, and we want to process 100% of our copper in our own smelters.

Arthur, does that answer your question?

Yes.

And Mr. Jacob, I don't see any further questions. I will pass it back to you for any final comments.

Okay. Thank you very much.

There's one more that just showed up, if you want to pick it up?

Please, please.

So you mentioned copper production for this year at about 999,000 tons. Do we also have guidance on copper production for next year and onwards?

Sure. Thank you very much for your question. For this year, I'm going to repeat the goal for the year for all the relevant metals that we produce. For copper in 2023, we're expecting to produce 932,000 tons; for molybdenum, 24,200 tons; for zinc, 108,000 tons; and for silver, 20.1 million ounces. With that, our expectation is that we should have a cash cost slightly lower than what we're seeing. This is obviously depending on by-product prices and volumes, where we know that we will be better in zinc and silver than we were last year. There is an expected 4% growth in copper production compared to 2022. For next year, we will have the positive full benefit of the zinc concentrator; we expect to produce about 120,000 tons of zinc coming from the Buenavista Zinc concentrator, which will bring total zinc production next year to 208,000 tons. For silver, next year, we're expecting 27 million ounces; for molybdenum, 26,300 tons; and for copper, 1,026,000 tons. But let me repeat the forecast for 2024 at this point. For copper, 1,026,000 tons; for molybdenum, 26,300 tons; for zinc, 208,000 tons; and for silver, 27.1 million ounces, and that's basically it.

And I am not showing any further questions, sir.

Okay. With this, we conclude our conference call for Southern Copper's second quarter of 2023 results. We appreciate your participation and hope to have you back with us when we report the third quarter of this year results. Thank you very much, and have a nice day.

Thank you. And with that, ladies and gentlemen, we thank you all for participating, and you may now disconnect.