Earnings Call Transcript - SCCO Q3 2025

Operator, Operator

Good morning, and welcome to Southern Copper Corporation's Third Quarter and 9 Months 2025. 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 third quarter and 9 months 2025 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 from 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.

Raul Jacob, CFO

Thank you very much, Carmen. Good morning, everyone, and welcome to Southern Copper's Third Quarter 2025 Results Conference Call. I'm joined today by Mr. Oscar Gonzalez Rocha, CEO of Southern Copper and a Board member, as well as Mr. Leonardo Contreras, also a Board member. We will start with an update on the copper market followed by a review of Southern Copper's key results, including production, sales, operating costs, financial results, expansion projects, and ESG. After that, we will open the floor for questions. Our performance in the third quarter set new records for net sales, adjusted EBITDA, and net income, showcasing the effectiveness of our strategy, execution, and commitment to sustainable growth. This strong performance was largely due to increased byproduct production and improved metal prices across all our products. Zinc production surged 46%, particularly thanks to significant output from our Buenavista zinc concentrator. Silver and molybdenum production also rose by 16% and 8%, respectively. The combination of increased production and better pricing allowed us to achieve a cash cost of $0.42 per pound of copper in this quarter, among the lowest in the industry. We remain dedicated to improving productivity and cost efficiency, focusing on our long-term objective of producing 1.6 million tons of copper at the most competitive cost. In the copper market, the LME price rose by 7%, from an average of $4.17 per pound in the first quarter of 2024 to $4.44 in the last quarter. The COMEX market experienced a 14% increase. Given the current supply and demand dynamics, including adverse production effects in Indonesia and Chile, we estimate a copper market deficit of nearly 400,000 tons. Worldwide copper inventories, combining the London Metal Exchange, COMEX, Shanghai warehouses, and other bonded warehouses, totaled 609,000 tons at the end of September, estimated to cover about 8 days of global demand. The recent U.S. tariff policy changes have had a limited impact on our results, reinforcing our confidence that long-term copper prices and that of other metals will remain strong. Now moving to Southern Copper's production for the last quarter, copper accounted for 73% of our sales. Copper production declined by 7% compared to the third quarter of 2024, amounting to 234,892 tons. This decrease stemmed from reduced production in Peru, primarily at our Toquepala and Cuajone mines. Our Mexican operations showed a similar 7% drop due to lower ore grades at our Buenavista mine, as the new concentrator focused entirely on maximizing zinc and silver production. Year-to-date, copper production has dipped 3% in 2025 to 714,098 tons primarily due to lower ore grades in both our Mexican and Peruvian operations. We anticipate producing 960,000 tons of copper this year, slightly below our plan, and a 2% decrease from the 2024 financial plan. Molybdenum made up 13% of our sales value in the third quarter and has the highest by-product value. Molybdenum prices averaged $24.30 per pound, representing a 12% increase from $21.68 in the third quarter of 2024, with a production rise of 8%. Our expectations for 2025 are to produce 30,000 tons of molybdenum, an increase of 4% from 2024. Silver comprised 7% of our sales value this quarter with an average price of $39.56 per ounce, up 34%. Mine silver production grew by 16% compared to the third quarter of 2024, driven mainly by growth in Mexico. We expect to produce 23 million ounces of silver in 2025, a 10% increase over last year. For zinc, which represented 4% of our sales value with an average price of $1.28 per pound, production soared 46% to 45,482 tons, mainly due to an increase in Buenavista zinc output of 108%, enabling us to achieve significant results this year. We expect to produce 174,700 tons of zinc in 2025, a 34% increase from our 2024 production level. Sales for the third quarter were $3.4 billion, $446 million or 15% higher than the same quarter in 2024. Despite a 4% drop in copper volume, sales value still increased owing to better prices, which saw the LME price rise by 7% and COMEX by 14%. Molybdenum sales saw a 46% increase due to volume growth and improved prices. Zinc sales rose 12% thanks to a 7% uplift in volume and higher prices, while silver sales soared 65%, fueled by a 22% volume increase and better prices. Our total operating costs and expenses increased by $128 million or 9% compared to the third quarter of 2024, driven by higher costs in purchased copper concentrate, labor, contractors, operations services, energy, and sales. However, these costs were partly mitigated by reduced inventory consumption. Adjusted EBITDA for the quarter reached $1,975 million, up 17% from $1,685 million in the third quarter of 2024. The adjusted EBITDA margin for this quarter was 59%, slightly above the 58% recorded in the third quarter of 2024, while year-to-date adjusted EBITDA stood at $5,512 million, marking a 13% increase compared to the same period in 2024. Operating cash cost per pound of copper, excluding by-product credits, was $2.23, up $0.12 from the previous quarter. The 5% rise in operating cash cost is attributed to higher production costs and administrative expenses, although it was offset by lower treatment and refining expenses. Including the effects of by-product credits, our operating cash cost was $0.42 per pound, reflecting a $0.21 or 34% decrease from the second quarter 2025 cash cost of $0.63. By-products credited totaled $895 million or $1.81 per pound this quarter, a 22% boost from the $756 million or $1.48 per pound in the previous quarter. Molybdenum credits increased by 23%, silver by 29%, whereas zinc saw a slight decline of 1%. In terms of net income for the third quarter, it amounted to $1,108 million, a 23% increase from $897 million in the same quarter of 2024, yielding a net income margin of 33%, up from 31% last year and reflecting primarily sales growth and cost containment efforts. Year-to-date net income has risen by 17% over 2024, with a margin of 32% compared to 30% for the prior nine months. Cash flow from operations in the third quarter reached $1,560 million, reflecting an 8.4% increase over the third quarter of 2024. For the first nine months of 2025, cash flow from operations totaled $3,258 million, up 6% compared to $3,061 million in the same period of 2024. Capital investments for our Peruvian projects could exceed $10.3 billion over the next decade. I will update you on major developments in our projects. The Tia Maria project in Arequipa is currently at 23% completion, creating 2,109 new jobs, of which 809 are held by locals. Our goal is to employ as many local workers as possible for the 3,500 jobs needed during the construction phase. Upon commencing operations in 2027, Tia Maria is expected to create 764 direct and 5,900 indirect jobs. Currently, access roads and platform construction is 90% complete. The Los Chancas project is progressing with social and environmental programs in local communities. We are addressing the illegal mining presence to regain control over the project, which is essential for its development. The Michiquillay project is conducting audits and studies to assess our mineral resources and optimal tailings storage solutions. Various projects in our Mexican pipeline, such as Angangueo, Chalchihuites, and the Empalme Smelter, could support our growth if valuable for stakeholders and local communities. Environmental, social, and corporate governance practices are improving, as highlighted by a 4-point increase in our Corporate Sustainability Assessment rating from S&P Global. This places us among the leaders in our sector, particularly noted for our transparency, environmental management, and community relations. Our operations have also benefitted from power supplied by the Fenicias wind farm, reducing greenhouse gas emissions by 180,000 tons this year, equivalent to the electricity needed for 40,000 Mexican households. In 2025, we are restoring ecosystems in Mexico and Peru, having rehabilitated 67 hectares in Sonora and 10 hectares in Peru, while preparing reforestation efforts over 200 hectares with irrigation systems. We are also financing educational projects in Cocachacra and Arequipa to benefit local communities. As for dividends, we regularly review our cash position, expected cash flow, investment plans, and financial needs at each Board meeting. On October 23, we announced a quarterly cash dividend of $0.90 per share and a stock dividend of 0.0085 shares per common stock share, payable on November 28, 2025, to shareholders of record by November 12. Thank you for your attention; I will now open the floor for questions.

Operator, Operator

And thank you so much. It comes from Carlos De Alba with Morgan Stanley.

Carlos de Alba, Analyst

What are the expectations in terms of cash cost before byproducts in the fourth quarter and maybe in 2026?

Raul Jacob, CFO

For the fourth quarter, Carlos, we will very likely decrease our cash cost because we will be having a partial recovery of production, particularly at the Peruvian operations, we believe that production will improve in the fourth quarter. So we are operating at about $2.23, if I recall it well. And we're expecting to have in the range of $2.15 to $2.20 in the fourth quarter.

Carlos de Alba, Analyst

Okay. How much did the company purchase in terms of third-party concentrate or cathodes in the third quarter? Additionally, could you share any expectations for the fourth quarter?

Raul Jacob, CFO

These acquisitions were intended for our operations in Mexico, specifically to enhance some of our facilities at the IMMSA mines. We will likely continue to purchase some materials from third parties in Mexico due to how well they blend with our own materials. This was the main reason behind these acquisitions.

Carlos de Alba, Analyst

But you're buying concentrate, you didn't buy cathodes even if the Ilo smelter was down.

Raul Jacob, CFO

No, no. We just sold more copper concentrate for the Peruvian operations because of the maintenance that the Ilo smelter and refinery had. We didn't acquire any copper cathodes, Carlos.

Carlos de Alba, Analyst

Okay. Good. And if I may, just one more. We regularly see headlines in Mexico about the government engaging with Southern Copper on discussions to try to remediate what they believe or some people believe are still pending actions by the company after the spill in Sonora. Can you maybe give us some comments as to what is the company's perspective on these negotiations and what initiatives and the potential financial impact those may have in the company?

Raul Jacob, CFO

Well, we are having these conversations now, and for us, this is a matter that was solved already. However, there are always good possibility of making progress in government talks for other objectives that the company may have. So there's not much to report at this point, Carlos, on this.

Operator, Operator

Our next question is from Timna Tanners with Wells Fargo.

Timna Tanners, Analyst

I wanted to ask with regard to silver, I realize you don't move your volumes on a dime, but the guidance seems to imply a quarter-over-quarter drop into Q4, and I wanted to make sure I understood that. But given the strong price of silver, is there anything you can do to try to produce a bit more in the next medium term?

Raul Jacob, CFO

Thank you for your question, Timna. This is what we have been doing through 2025. We have the new concentrator in Buenavista, which is a concentrator that has the capacity of producing copper and zinc. In other years, last year, for instance, 2024, we did bundles of copper production as well as zinc production. But looking at the areas that we were getting into in 2025 and the zinc content, the zinc ore that we were finding in this part of the Buenavista mine, we decided to not produce copper with this new concentrator of Buenavista in this year, but zinc. And the reason for that is that the zinc content is much higher. That's why we are producing a significantly greater amount of zinc than last year. And obviously, the copper that we produced with this facility last year that was in the north of 12,000 tons was not produced in the same facility in 2025. So that explains why we are not producing as much copper as in 2024. Now as I mentioned before, we're very close to less than 1% of getting all the copper that we forecasted in our plan now. We're hopefully making the plan and the plan when we announced it last year had a reduction in copper production of about 2%. Obviously, if we see opportunities to improve this, we will certainly try to do it. But that's so far what we're considering for this year, Timna.

Timna Tanners, Analyst

Okay. My question was more about silver just because of the strength of that market. But if you could comment on silver. And then my second question was more about any updated thoughts on M&A given some additional M&A in the space? Are you still preferring your organic projects? Or given some delays there, would you start to look at maybe buy versus build?

Raul Jacob, CFO

We are producing more silver this year compared to last year and have updated our silver production forecast to 23 million ounces, which is a 10% increase over last year and an improvement for 2024. Regarding M&A, we are primarily focusing on organic growth. The projects we are working on have strong economics, significantly better than outside opportunities. We will consider any attractive opportunities that arise and make recommendations to our Board, but for now, we are committed to our current plans.

Operator, Operator

Our next question is from the line of Alejandro Demichelis with Jefferies.

Alejandro Anibal Demichelis, Analyst

A couple of questions, if I may. Raul, could you give us some kind of indications of how you're seeing 2026 in terms of volumes, CapEx and so on? That's the first question. And then the second question is, obviously, we have seen the change in government recently in Peru. We have seen some protests and the state of emergency. So have you seen any kind of impact on the areas in which you are producing or in the ports in the South where you're kind of exporting from?

Raul Jacob, CFO

Let me address your last question first. We are not experiencing any impact on our operations from the political situation in Peru. The current President has a 45% approval rating according to the latest poll. I believe the protests you mentioned are diminishing, particularly in the southern part of the country where we operate, specifically in Apurimac, where our projects are running smoothly. We are currently working with authorities to resolve a legal mining issue in that area. In the northern region, at Michiquillay, there are no issues regarding social unrest. The Tia Maria project is progressing as I previously reported. Looking ahead to 2026, we are reviewing our expectations for next year, currently forecasting approximately 911,000 tons of copper to be produced. We aim to refine this forecast further. Regarding cash costs, they're contingent on byproduct prices, but we expect them to remain at or better than current year-to-date levels if prices remain stable as they have in the past quarter. For capital expenditures, we are entering the construction phase of Tia Maria next year, which will require about $866 million on its own. As a result, we anticipate total CapEx will reach around $2 billion for next year.

Operator, Operator

Our next question is from Myles Allsop with UBS.

Myles Allsop, Analyst

Maybe with Tia Maria, could you just give us a sense, you've got the authorization to start exploitation now. Do you have all the permits that you need to push ahead with the project? And when do you think we'll get to completion of the project and the ramp-up phase?

Raul Jacob, CFO

Sure. The straightforward answer to your question is yes. We have all the necessary permits to initiate construction and develop mining activities. Once construction is finished, we will need to obtain a final permit from the authorities to start operations, which is more of a routine permit. We expect the project to ramp up through 2027, and hopefully by mid-2027, we will begin initial testing of the equipment and the ramp-up process. We operate similar plants to the one we want to build in Tia Maria at other locations in Mexico and Peru, so we are optimistic about the timeline for ramping up. We will keep you updated as we progress with the project.

Myles Allsop, Analyst

Okay. And in terms of the financing, I know in the past, you've done bonds to link to the kind of project, kind of CapEx. Is it still the intention that you'd finance it along those routes?

Raul Jacob, CFO

As we progress, we're monitoring the situation closely. With interest rates on the decline, we view this positively. However, we're still considering whether to proceed with issuing a bond or utilizing our own capital. It's likely that we'll eventually access the debt market to finance our Tia Maria project.

Myles Allsop, Analyst

Okay. As you consider the organic growth path, which of the upcoming projects, Los Chancas or El Arco, do you think will be ready for Final Investment Decision first? What needs to happen for each to reach that stage? Or is there another project we should expect to come forward after Tia Maria?

Raul Jacob, CFO

Well, the timeline that we have is that Los Chancas should be the next project in terms of execution. Michiquillay is also in line for that. The results of Michiquillay have been very, very interesting, very good, actually. We are quite encouraged to move on with it, but we still need to do some work that has been already done for Los Chancas. In the case of El Arco, it's also scheduled to move on entering in the next decade. And hopefully, we will be able to do that as well.

Myles Allsop, Analyst

So assuming that the Los Chancas is the next project, how optimistic are you that the illegal miners of the land would you be in a position to actually FID a project? Is it still 2 years after getting the illegal miners? Or can that be brought forward?

Raul Jacob, CFO

It could be accelerated a bit. We need to engage with the Peruvian authorities to determine when they will take action regarding the legal mining activities happening there. We are collaborating with the communities because we believe that involving them in discussions with the authorities about this issue could also lead to a resolution.

Operator, Operator

Our next question comes from the line of Alfonso Salazar with Scotiabank.

Alfonso Salazar, Analyst

I have 2 questions. And first of all, sorry to put you on the spot, but a moment ago, you said that you are focusing on organic growth, but we see that on the capital allocation front you already have been increasing your cash position quite fast. It's now at $4.5 billion. And if you continue with the hybrid dividends and given the cash generation that you are having today, this will continue to pile up. So I just want to understand how to reconcile these 2 things, especially what is the rationale behind having so much cash and increasing your cash position at this time? The second question is regarding Tia Maria. And it's great to see that the project is moving ahead, but I think it's about to start a critical moment with elections in Peru and potential protest and noise against Tia Maria once again. So just wondering what is the action plan? What are you doing to deal with such situation in case it comes?

Raul Jacob, CFO

Regarding the company's cash position, we currently do not have the debt required to finance Tia Maria, which is why our cash levels are slightly higher than usual. Additionally, prices are contributing to this situation. We have a comfortable cash position that allows us to continue paying the approved dividends and manage our ongoing projects. As for potential social or political impacts in the Tia Maria area, while that is always a risk, we are not currently experiencing any issues. We are actively engaging with local communities and authorities, particularly the mayors of Islay province, where Tia Maria is situated. So far, we are observing a calm environment that is favorable for the project. We are continuously monitoring the social conditions, but at this point, we do not have any concerns about the political campaign's impact in the area.

Operator, Operator

We have a question from the line of Tingshuai Feng from CICC.

Tingshuai Feng, Analyst

This is David. Congratulations on the strong results. My first question is about LPR. We know that on your slides, LPR is still expected to start production in 2028. While the project is not mentioned in the latest quarterly press release. So I'm just wondering, can we have any updates on the project development progress at LPR? I'll come back with my second one.

Raul Jacob, CFO

Okay. Thank you for your question, David. No, we have not much to report on it. We are looking into the recovery that the leaching part of the project has. And so far, we have no major progress on this at this point. So that's why we haven't mentioned it in our press release.

Tingshuai Feng, Analyst

Understood. And my second question is just a follow-up on Los Chancas. We noticed that recently there is some discussion about extending the reinforce scheme by 5 more years. So just want from your perspective, any further extension of the scheme will have any impact on your development plan at Los Chancas, especially when you're dealing with the illegal miners.

Raul Jacob, CFO

At this point, we do not have anyone with the specific permit you mentioned on the project site, so it is not an issue for us right now. The rainfall permit you referred to must be reviewed by Congress. We believe Congress is becoming aware of what we are observing, which is that a majority of the population in Peru opposes illegal mining activities. This sentiment has been strongly reflected in polls and other measures. Therefore, we do not think there should be any extension of this type of permits.

Operator, Operator

Our next question is from the line of Matheus Moreira with Bradesco BBI.

Raul Jacob, CFO

Matheus, do you have a question? Okay. Let's move on. He may connect later.

Operator, Operator

Our next question is from the line of Jon Brandt with HSBC.

Jonathan Brandt, Analyst

I have two quick questions. I understand this is a Board decision, but regarding the dividend, has the Board provided any reasoning for continuing with the stock dividend? The cash dividend is quite good at $0.90, so I'm struggling to see the rationale behind the stock dividend. I'm hoping you can clarify this for me. My second question pertains to hedging. Have you considered the possibility of hedging, even if it's not copper, perhaps for some byproducts like silver and molybdenum that have performed well? This seems particularly relevant as you enter a capital expenditure phase next year with Tia Maria, and I would assume that the CapEx will remain high when starting on Los Chancas and so forth. I'm curious if there have been discussions about locking in some of these elevated metal prices.

Raul Jacob, CFO

Okay. Let me address your last question first. We have not had any specific discussions about hedging, including copper or byproduct hedging, at this time. In the past, during the Toquepala expansion, we used a zero-cost collar for hedging, which I believe was a beneficial strategy because it helped us protect copper revenues while undertaking a major project. Regarding the stock dividend, as you mentioned, that is a decision made by the Board. We wouldn't be able to distribute the dividends we've been offering without utilizing a portion of the shares. The company can pay out $0.90 in cash, but to provide shareholders with more liquidity, we need to use shares that were acquired before 2016 at a significantly lower price. That is what the Board has been evaluating and determining.

Jonathan Brandt, Analyst

Can you tell us how many shares are left? Should we assume that the stock dividend will continue until those shares are depleted?

Raul Jacob, CFO

We have about 65 million at this point, before paying the dividend, it's 72 million shares that we have in treasury.

Operator, Operator

Our next question comes from the line of Grant Sporre with Bloomberg Intelligence.

Grant Sporre, Analyst

The question is regarding your medium-term copper guidance. I'm looking at the chart you provided after the second quarter results, which shows an increase of about 50,000 tons for 2027 and another 70,000 tons for 2028. I understand these figures are frequently reviewed, but if we assume they are still in line with your expectations, could you explain the dynamics behind that? Are you anticipating a ramp-up for Tia Maria and then El Pilar to offset some of the grade decline in your existing operations? How should we approach this?

Raul Jacob, CFO

Yes, Grant. Essentially, we are projecting that in 2027, the ramp-up of Tia Maria will lead to an increase in our production as we begin operations on our major projects. Production from Tia Maria will commence in 2027, while Los Chancas and Michiquillay will come online later, more in the 2030s. In the meantime, we anticipate El Pilar starting in 2028 and El Arco in 2029. Regarding our current operations, we are facing some ore deterioration in the long term, and we are considering actions to mitigate its full impact. Specifically, at Cuajone, we expect a decline in ore grades beginning next year, and we plan to expand the Cuajone concentrator to manage this issue. Although this expansion has not yet received Board approval, it is a potential option we are exploring. We are also evaluating other measures across different operations to maintain and even increase our production levels as we approach 2030.

Operator, Operator

And we have a question from the line of Marcio Farid with Goldman Sachs.

Marcio Farid Filho, Analyst

I have a quick follow-up on the two projects you mentioned. For Tia Maria, you expect to potentially ramp up production in the first half of '27. To recover part of the loss in '27, you would need significant volumes from Tia Maria, which seems to be included in today's guidance. Can you share how confident you are in achieving nearly 100,000 tons of production at Tia Maria by '27, given the current schedule? Additionally, regarding Cuajone, I believe we've previously discussed the possibility of adding another concentrator there. What is the expected timeline for when that decision will be discussed or made by the Board? Lastly, if there are any changes to the guidance for '26, '27, or '28, how should we consider costs in terms of lower fixed cost dilution?

Raul Jacob, CFO

Thank you for your question, Marcio. For Tia Maria, we plan to start production in 2027. We are still evaluating our production plans for the coming years, and I mentioned that we expect to produce more than 911,000 tons next year. We hope to provide updated figures in our January report, which will also include clearer guidance for the next few years. Regarding the Cuajone expansion, we are considering options. It will not involve a new concentrator but rather a new line in the existing concentrator, which could be less expensive. We estimate the project could cost between $600 million and $700 million and yield around 40,000 tons of copper. This plan has not yet been approved by the Board, and we are working on developing a solid case to present. If we finish our work and provide guidance to the Board next year, we might receive initial approval. After obtaining all necessary permits, we could then seek final construction approval. I believe I have addressed your questions unless you have further comments, Marcio.

Operator, Operator

Thank you so much. And this concludes our Q&A session for today. Thank you, everyone, and I will pass it back to Raul Jacob for any final comments.

Raul Jacob, CFO

Thank you very much, Carmen. With this, we conclude our conference call for Southern Copper's first quarter of 2025. We certainly appreciate your participation and hope to have you back with us when we report the fourth quarter and full 2025 results. This will be in our January call. Thank you very much for being with us today, and have a nice day.

Operator, Operator

Thank you so much. And this concludes our conference for today. You may now disconnect. Everyone, have a great day.

Raul Jacob, CFO

You too.