Southern Copper Corporation

Good morning, and welcome to Southern Copper Corporation's first quarter 2020 results conference call. With us this morning, we have Southern Copper Corporation Mr. Raul Jacob, Vice President, Finance Treasurer, and CFO, who will discuss the results of the company for the first quarter 2020, as well as answer any questions you may have. The information discussed on today's call may include forward-looking statements regarding the company's results and prospects, which are subject to risk and uncertainty. Actual results may differ materially, and the company cautions not to place under due reliance on these forward-looking statements. Southern Copper Corporation undertakes no obligation to publicly on today or revise any forward-looking statements, whether as a result of new information future events, or otherwise. All results are expected in full U.S. data. Now I will pass the call to Mr. . I will speak up.

Thank you very much, Carmen, and good morning, everyone, and welcome to Southern Copper's first quarter of 2020 results conference call. Participating with me in today's conference are Mr. Oscar Gonzalez Rocha, Southern Copper's CEO and board member, and Mr. Javier Garcia de Quevedo, also a board member. Before we go into the details of the past quarter, let me first express my best wishes for you and your loved ones in these difficult times that we're currently facing. In today's call, we will begin with an update on the fight against the COVID-19 pandemic and its impact on our operations. We will then review the copper market and Southern Copper's key results related to production, sales, operating costs, financial results, and expansion projects. After that, we will open the session for questions. The fight against the COVID-19 pandemic. Taking proper care of our personnel has always been of paramount importance to our company. While confronting the COVID-19 pandemic in the countries where we operate, Southern Copper continues essential operations in compliance with local emergency measures. As soon as COVID-19 was declared a pandemic, Southern Copper implemented rigorous hygiene and sanitation protocols at all of its facilities to protect the health and welfare of its employees, their families, and the neighboring communities. The statements from governmental authorities have made it clear that essential economic activities must continue during the COVID-19 health emergency and that industrial mining, which is closely linked to chemical and construction industries, is essential to the requirements of electrical, hospital, and medical infrastructure, as well as for the manufacturing of health-related supplies and technological equipment. These industries are indispensable and strengthen the infrastructure of manufacturing, logistics, and support global supply chains. The strategic position of industrial mining as a supplier of key materials such as steel, copper, gold, coal, silver, zinc, and cement has been recognized by the U.S., Canada, Mexico, and Peru. These countries have confronted COVID-19 through social distancing and stay-at-home measures and recognize that industrial mining is indispensable to avoid the interruption of supply chains of essential products to fight the pandemic. Copper is indispensable for the manufacturing of specialized cables required to produce high-voltage electrical installations that supply electrical power to local communities, hospitals, and supply centers. Indeed, copper is essential for the manufacturing of electrical components required to generate, transmit, and distribute electrical power to urban centers. Electrical and electronic copper components are also necessary for medical equipment and appliances, cell phones, computer hardware, digital data transmission, images, and voice. Copper is also required in surfaces to remove viruses and bacteria, which make it essential for the production of drinking water and air conditioning systems. Chemical industries, with their metallurgical processes, have proved to be vital in the fight against the COVID-19 pandemic affecting the world. Given the nature of mining operations, which are highly automated, conducted in remote locations, and with mandatory use of personal safety equipment, it is easier to implement and comply with COVID-19 protective measures, such as physical isolation and access control. Industrial mining uses advanced and reliable machinery, and does not require high physical concentration of employees. In many cases, workers fulfill their duties, maintaining distances of more than 100 meters from their coworkers. The company has developed rigorous COVID-19 emergency protocols, and only 40% of the labor force in Mexico, or about 6,300 employees, are currently working on sites under strict safety measures. The remaining workforce of 8,751 employees are working from home, including all high-risk individuals due to age or prior medical conditions. For the Peruvian operations, about 3,500 employees, or 39% of the workforce, are working on site under strict safety measures, while the remaining 5,468 employees are working from home or staying at home. It should be noted that today there have been not known cases of COVID-19 contagion among our employees at our mining facilities in Mexico and Peru. Our COVID-19 emergency protocol has reinforced preventive measures such as disinfecting, clinical monitoring before work, cleaning and sanitizing of work areas, and respect for social distancing. We have also restricted access to contractors, suppliers, and non-essential personnel, and enforced multiple actions to limit workforce exposure to COVID-19, such as travel restrictions, prohibiting face-to-face meetings, and urging frequent hand washing, as well as adherence to other health, safety, and social distancing measures issued by governmental authorities. From the beginning of the COVID-19 pandemic, Southern Copper has been implementing strong prevention measures to protect the health of its workers, their families, and their communities. For this purpose, the company has approved a budget of $11.2 million for donations and general support for the population of Peru and Mexico. As a way to contend With the pandemic, we have donated medical supplies and dozens of mechanical ventilators for breathing supports to hospitals in their communities where we operate. In Sonora, we have established 88 confined beds in company housing property to serve as temporary sanitary facilities for people presenting symptoms of respiratory disease who require isolation or moderate hospital care. We are also donating over 200,000 items of personal protection equipment to medical staff and 30,000 hygiene kits to our workers and to the population of our areas of influence, including general information materials about the pandemic. We have also donated cleaning and personal protection equipment to the staff members of the National Guard of Mexico and the Peruvian Police and Army. Additionally, we're helping vulnerable individuals such as the elderly or disabled persons and pregnant women by donating more than 30,000 kits containing food and hygiene items. In addition to the above-mentioned efforts, we have installed more than 200 portable sinks in strategic areas of the communities in order to reinforce preventive hand washing. Moreover, to endorse the stay-at-home measures, We have offered over 350 sports, cultural, and educational workshops online. And over 58,000 virtual instructive activities have been watched by 3,700 students from the schools sponsored by our company. Additionally, throughout our community care service, we offer free medical, psychological, and employment counseling 24 hours a day. Now let us focus on the copper market, the core of our business. Copper. During the first quarter of this year, the London Metal Exchange copper price decreased from an average of $2.82 per pound in the first quarter of 2018 to $2.56 per pound. That is a 9.2% reduction. As of today, we're seeing prices in the range of $2.20 to $2.30 per pound. Today it's about $2.33, for instance. As a reflection of the impact of the COVID-19 crisis on the demand and on copper supply. The world is currently experiencing the public health, financial, and economic impact of the COVID-19 pandemic. Since it is affecting both supply and demand, at this point it is difficult to assess the full effect of this crisis on the copper market balance and on copper prices. Let me say that on a normal year, we expect to have a seasonal copper inventories increase of about 200,000 to 250,000 tons in the first quarter of the year due to the New Year festivities of China and the winter impact on demand at the northern hemisphere. This year, we have the COVID-19 outbreak as an additional factor affecting copper demand and supply, and obviously copper prices. At the end of 2019, copper demand for refined copper was estimated at 23.6 million tons, and global inventories, that is the addition of the London Metal Exchange, the COMEX in Shanghai warehouses, and an estimate on bonded warehouses, that number of inventories, the sum of those, were 599,000 tons. By the end of February of this year, these inventories' warehouses add up to 917,000 tons, or 318,000 tons higher than the inventories at the end of last year. Last Friday, April 24, global inventories were estimated at 925,000 tons, This is 326,000 tons over the closing of 2019, not a reliable stable mark since they increased at the end of February. We believe this reflects the mentioned seasonal effects of about 250,000 tons due to the Chinese New Year and the winter effects that I mentioned, as well as the additional market surplus created by the COVID-19 pandemic. In a normal year, we expect the additional inventory to be partially absorbed through the rest of the year. For 2020, it is difficult to estimate when this may happen since we are seeing a much weaker demand than last year. Let us now focus on southern copper's production for the past quarter. Copper represented 79.4% of our sales in the first quarter of 2020. Copper production increased by 5.8% to 241,967 tons in the first quarter, compared to 228,629 tons in the first quarter of last year. This was principally due to higher production at our Peruvian mines. Toquepala mine production increased by 14.5% as a result of additional copper production of 8,574 tons from the new concentrator and guajone mine production increased by 23.2% due to higher ore grades and recoveries. In Mexico, copper production slightly decreased by 1.4% when compared to last year's first quarter, mainly due to lower production of the Buenavista operations as a result of lower ore grades. This effect was partially observed by higher production at our INSA unit that increases truffle production by 30.5% as a result of the restoration of the San Martin mine operations. For molybdenum, it represented 7.3% of the company's sales value in the first quarter of 2020, and is currently our first high product. Molybdenum prices averaged $9.56, cents per pound in the quarter, which compares with $11.70 per pound in the first quarter of 2019, an 18.3% decrease. Molybdenum mine production increased by 39.7% in the first quarter of 2020 compared with the first quarter of last year. This was principally due to significantly higher production at our Toquepala mine. We had a new molybdenum plant plant starting in the second quarter of 2019, and as a result of that, the Tokepala mine increased its production by 280% in the first quarter of this year. Well, this plant produced 993 tons of new molybdenum production, and as I say, began operation in April of last year. We also have the benefits of much higher production of molybdenum and guajoni, which increases its molybdenum production by 42.6% due also to higher grades. Silver represented 5.1% of our sales value in the first quarter of 2020, with an average price of $16.87 per ounce in the quarter, an 8.7% increase from the first quarter of last year. Silver is currently our second high product. Mine silver production increased by 21.6% in the first quarter of this year, from the first quarter of 2018, as a result of higher production at all our operations, particularly at INSA, the underground complex mines that we have, which increased its production by 35.7% due to restored production at the San Martin mines. San Martin approximately had 607,000 ounces in the first quarter of this year of silver, ounces of silver. In addition, there was higher production of the Toquepala mine that increased its production by 16.3% in silver. That was 128,000 ounces of silver from the new concentrator, as well as higher production at the Buenavista mine that increased its production by 13.3% due to higher grades and recovery. For zinc, it represented 3.8% of our sales value in the fourth quarter of this year, with an average price of $0.97 per pound in the quarter, a price decrease of 21.1% from the first quarter of last year. Zinc, by production, increased by 3.8%, to 19,263 tons in the first quarter of 2020, mainly due to 3,851 tons of new production coming from the San Martin mine, as well as increased production in the Sarcas mine that increased its production by 9.5%, and Santa Barbara that also increased its production by 7.2%. These two operations plus San Martin were partially upset by the Santa Eulalia mine production reduction that reduced its production by 90%. Santa Eulalia, regarding this operation, the company has decided to shut down its mine facilities due to several flooding events at the mine. We're currently evaluating different options to supply the concentrators of Santa Eulalia. Refining production increased by 8.5% in the first quarter of 2020 compared to the first quarter of 2019. Financial results. For the first quarter of 2020, sales were $1.7 billion. This is $33.7 million lower than sales for the first quarter of last year, or 1.9% lower. Copper sales volume increased by 10.6%. The value decreased by 3.5% in a scenario of lower prices. As I mentioned, London Metal Exchange price decreased by 9.2% quarter on quarter. Regarding our main byproducts, we have higher sales of molybdenum by 6.6% due to higher volume of 41.9% partially upset by lower prices. Silver sales increased by 14.7% due to higher volume and better prices. For sales of zinc, even though we had higher volume of 7.1%, its value was lowered by 15.4% due to lower prices. Our total operating costs and expenses increased by $126.7 million, or 12%, when compared to the first quarter of 2018. The main cost increment has been in purchased copper, 77.4 million dollars, lower capitalized leachable material, 73.5 million dollars, preferred materials, 15.8 million dollars, depreciation, 11.3, and other factors. These cost increments were partially compensated by exchange rate variances that decreased costs by 30 million dollars, and lower inventory consumption by $20.6 million, and fuel costs that decreased by $8.7 million in the first quarter. Regarding EBITDA, for the first quarter of 2020, it was $718.8 million. This is a 41.8 percent margin compared with $889 million, or a 50.8 margin, in the first quarter of 2019. Operating cash costs per pound of copper before by product credits was $1.42 per pound in the first quarter of 2020. That is 17.1 cents lower than the value for the fourth quarter of last year. This 10.8% decrease in operating cash costs is a result of lower costs per pound from production costs, treating and refining charges, and administrative expenses, partially offset by lower premiums. Southern Copper operating cash costs, including the benefit of by-product credit, was 77.4 cents per pound in the first quarter of 2020. This cash cost was 20.4 cents lower than the cash cost of 97.8 cents per pound in the fourth quarter of 2019. This is a 20.9% reduction in cash costs. Regarding byproducts, we have a total credit of $332.2 million, or 64.1 cents per pound, in the first quarter of 2020. These figures represent a 5.6% increase when compared with the credit of 60.7 cents per pound in the fourth quarter of 2019. Total credits have increased for molybdenum, zinc, and sulfuric acid and decreased for sales. Net income attributable to FTC shareholders in the first quarter of 2020 was $214.8 million, that is 12.5% of savings, or diluted earnings per share of $0.28 per share of capital expenditure. Southern Copper, as you know, has an investment philosophy of not basing its growth on the outlook of copper prices, but on the quality of the assets that we operate and develop. Throughout the years, our strong financial discipline has consistently allowed us to invest on a continuous basis in our great asset portfolio. In the first quarter of 2020, we spent $101 million on capital investments This is a 41.7% lower than the same period of 2019 and represents 58.8% of our net income for the quarter. For the Peruvian project, we currently have a portfolio of $2.8 billion of approved projects in Peru, of which $1.6 billion have already been invested. Considering the up-and-coming Chiquillay $2.5 billion project, and Los Chancas, a $2.8 billion project, our total investment program in Peru will increase to $8.1 billion. For Tia Maria, on July 8th of 2019, we received a construction permit for this 120,000 tons annual SXEW copper greenfield project with a capital budget of $1.4 billion. The government awarded the permit after completing an exhaustive review process of environmental and social matters recognizing compliance with all established regulatory requirements, and having addressed all observations raised. The challenges to the construction permit were defeated on October 30 of last year when the Mining Council of the Peruvian Ministry of Energy and Mines ratified the construction permit for the Tia Maria project. For the Mexican project, in the case of Mexico, as you know, we have three projects, the Buenavista Sink Project, concentrator, which is in Sonora. It's a project that is located within the Buena Vista facility and includes the development of a new concentrator to produce approximately 80,000 tons of zinc and 20,000 tons of copper per year. Currently, we have completed the basic engineering and the detailed engineering is in process. The site preparation has started and the purchase orders for the new equipment have been placed. The project is fully permitted. The capital budget is $413 million, and we expect to initiate operations in the third quarter of 2022. When completed, this facility will double the company's same production capacity and will provide 490 direct jobs and 1,470 indirect jobs. For the Pilares project, also located in Sonora, This is a project that is six kilometers away from La Caridad. This project consists of an open-pit mine operation with a manual production capacity of 35,000 tons of copper in constitutes, a new 25-meter wide off-road facility for mining structures under construction, and will be used to transport the ore from the pit to the primary crushers of the La Caridad copper concentrate. This project will significantly improve the overall mineral ore rate, combining the 0.78% expected from Pilates, the ore rate of Pilates, with the 0.34% ore rate from La Caridad. The budget for Pilates is $159 million, and we expected to start production during the first half of 2022. The third project in Mexico that we're undertaking is a project at Pilates, also in Sonora. This is a low capital intensity copper green pit project, which is approximately 45 kilometers from our Buenavista mine. Its copper oxide mineralization contains estimated proven and probable reserves of 325 million tons of ore with an average copper rate of 0.287%. El Pilar will operate as a conventional open pit mine and copper catalysts will be produced using the highly cost-efficient and environmentally-friendly SXEW technology. The budget for Epilar is $310 million, and we expect it to start production during 2023. The construction of the pilot plant is finished, and the production tests are being developed with encouraging results. Regarding dividends, as you know, it is the company policy to review at each board meeting the company's cash position, expected cash flow generation from operations, capital investment plan, and other financial needs in order to determine the appropriate quarterly dividend. Accordingly, as announced to the market on April 23rd, the Board of Directors authorized a cash dividend of $0.20 per share of common stock stable on May 26 to shareholders of record at the close of business on May 13 of this year. Despite the strong cash position of the company and the reasonably good results for the quarter due to uncertainty of the metal markets and war economy and the important expansions planned by our company, the board has taken in this occasion a more cautious approach regarding bidding. Consequently, our report approved a dividend equivalent to 50% of what the company has been paying the last few quarters. Considering Southern Copper's strong financial condition and competitive cost structure, we have no doubt that Southern will endure the current difficult times and overcome the crisis. With this in mind, ladies and gentlemen, thank you very much for joining us, and we would like now to open up the forum for questions.

Thank you. And ladies and gentlemen, as a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. And our first question is from Alfonso Salazar with Scotiabank. Please go ahead, Alfonso.