Southern Copper Corporation

Good morning and welcome to Southern Copper Corporation's second quarter in six months 2024 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 in six months 2024, 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 risk 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. Good morning, everyone, and welcome to Southern Copper's second quarter 2024 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, who is also 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 costs, financial results, expansion projects, and ESE. After this, we will open the session for questions. Now let us focus on the copper market. The London Metal Exchange Copper Prize increased 15% from an average of $3.85 per pound in the second quarter of 2023, up to $4.42 this quarter. Based on the production cuts announced by several producers and other information to date, we're expecting a market deficit of about 217,000 tons of copper for 2024. At this point in time, we estimate that the copper supply will increase slightly by 0.6%. That's about half of a percentage point. Looking at the demand, even though we see weak China's demand mainly from its real estate market, a resilient U.S. economy, and new demand from decarbonization technologies as well as artificial intelligence, are supporting copper demand and prices. Now let's look at Southern Copper's production for the past quarter. Copper represented 76% of our sales in the second quarter of this year. Copper production reached 76% in the second quarter in quarter-on-quarter terms to stand at 242,474 tons. Our quarterly results reflect a 15% increase in production in Peru, and this improvement was driven by growth at the Toquepala mine, which increased its production by 21%, which was boosted by higher oil grades. Production at our Mexican operations increased by 0.7% in quarter-to-quarter terms, mainly due to higher production at our La Caridad mine, partially offset by a decrease in the production at Buena Vista and INSA. For 2024, we expect to produce 963,223 final prints. This growth will be fueled by recovery at our SXEW facilities at Buena Vista and by the copper production of our new Buena Vista sink concentrator which is operating at full capacity. Molybdenum production represented 12% of the company's sales value in the second quarter of this year and is currently our first pet product. Molybdenum prices average $21.69 per pound to $20.87 per pound in the second quarter of last year. This represents an increase of 4%. Molybdenum production increased by 21% in the second quarter compared to the same period of last year. This was mainly driven by higher production at the Plurian operations and the Buena Vista mine due to higher ore grade. These results were partially offset by lower production at La Caridad mine. In 2024, we expect to produce 27,400 tons of molybdenum, which represents an increase of 2% over our 2023 production level. Silver represented 5% of our sales value in the second quarter of this year, with an average price of $28.84 per ounce in the quarter, which reflected an increase of 19% versus the 2023 second quarter price. Silver is currently our second by-product. Mine silver production increased 8% in the second quarter of 2024 versus the same period of 2023. With the sole exemption of INFA, production rose at all our operations. Refined silver production increased by 28% quarter over quarter which was mainly driven by growth in our La Caridad and Hilo refineries. In 2024, we expect to produce 20.6 million ounces of silver, an increase of 12% compared to 2023. Zinc represented 4% of our sales value in the second quarter of this year, with an average price of $1.29 per pound in the quarter, which represents a 12% increase in price compared to the second quarter of last year. Zinc mine production increased 71% quarter and quarter and total 29,419 tons. Growth was driven primarily by the 13,653 tons produced at the new Buena Vista Zinc Concentrator and by an increase in production at the Charcas mine. We find zinc production increased 6% in the second quarter of 2024, vis-a-vis the second quarter of last year. For this year, we expect to produce 121,800 tons of zinc, which represents an increase of 86% over our 2023 production level. We are increasing our expected production for zinc in 86% this year. This growth will be driven by production at our Buena Vista zinc concentrator that will have 55,400 tons, which has ramped up to better than planned. For 2025 and on, we expect to produce 178,000 tons of zinc per year. financial resource. This year, net sales were 3,818 million, which represented growth of 36% with regard to the second quarter of the past year. Expansion was primarily fueled by an increase in sales volumes of copper, which grew 5.5%, by 21% increase, Silver, 32% increase, and zinc, 78% increase in sales volumes. Also, we had an increase in metal prices for all of our products. Our total operating costs and expenses increased 111 million, or 8%, when compared to the second quarter of last year. The main cost increment has been in workers' participation, repair materials, contractors and operating materials, sales expenses, copper, and other factors. These cost increments were partially offset by a decrease in the energy cost and in exchange rate variance. In the first half of the year, we saw unitary cost reductions for several materials and services, such as branding media, steel, explosives, tires, and power costs. These savings, however, have been somewhat offset by higher costs associated with growth in production and sales volume, and by an increase in maintenance and contractors' expenditures, which we are closely monitoring and controlling. Looking at our EBITDA, the second quarter of this year adjusted EBITDA was $1,797 million, which represented an increase of 61% with regard to the $1,116 million registered in the same period of 2023, the second quarter. The adjusted EBITDA margin in the second quarter of this year stood at 58% versus 49% in the same period of 2023. Adjusted EBITDA in the six months of 2024 was $3,215 million. This is 20% higher than what we had in the six months of last year. Adjusted EBITDA margin for the first half of the year stood at 56% versus 53% in the same period of 2023. Cash costs. Southern Copper's operating cash cost, including the benefit of by-product credits, was 76 cents per pound in the second quarter of 2024. This cash cost was 31 cents lower than the cash cost of $1.07 that we had for the first quarter of 2024. This is a 29% reduction in cash cost. Before by-product credits, the operating cash cost was $2.15 per pound this past quarter. This is 4 cents higher than the value that we had for the first quarter of 2024. This 2% increase in the operating cash cost before virtual credit reflects an increase in cost per pound from production costs, administrative expenses, lower premiums, And these higher costs were partially offset by lower treatment and refining charges. Regarding byproducts, we had a total credit of $716 million, or $1.40 per pound, in the second quarter of this year. These figures represent a 34% increase in byproducts. when compared with the credit of $532 million, or $1.04, that we had in the first quarter of this year. Total credits have increased for molybdenum, zinc, and silver, and decreased somehow for sulfuric acid. The second quarter of 2024 net income was $950 million, which represents a 74% increase with regard to the $548 million registered in the second quarter of last year. The net income margin in the second quarter stood at 31% versus 24% in the second quarter of 2023. This increase was mainly driven by a 36% increase in sales, which was partially upset by higher operating costs related to sales volume, GMA, and exploration expenses. On a year-on-year basis, net income was 24% higher than in 2023 for similar reasons. Cash flow from operating activities in the six months of this year was $1,622 million, which represents a decrease of 18% compared to the $1,982 million posted in the six months of 2023. Cash flow in the first half of this year was affected by a significant increase in working capital of $511 million, which was mainly driven by an increase in accounts receivable at our Mexican operations. For capital investments, our current capital investment program exceeds $15 billion, and it's included And it includes investments in the Tia Maria, Los Chancas, and Michiquillay projects in Peru, and in the Buenavista Sink, El Pilar, and El Arco projects in Mexico. This capital forecast includes several infrastructure investments, including key investments to both of the El Arco projects. In the second quarter of this year, we spent $332 million on capital investments, which reflected a 31% increase over the figure reported in the second quarter of 2023 and represents 36% of net income this quarter. In the first half of the year, we spent $546 million on capital investments, which represents 33% of net income and reflects the impact of an 11% increase in capital expenses year on year. Since there is a description of our main capital projects in southern coppers personally, I'm going to focus on updating new developments for each. This past quarter, we completed ramp up at the Buena Vista Think Concentrator, which graduated from project to operating unit status. The Think Concentrator is operating according to our expectations. producing 23,300 tons of zinc and 5,500 tons of copper today. Our projections indicate that we will comply with the 2024 plan of producing 55,400 tons this year. And we expect this facility to generate an average of 90,200 tons of zinc and 20,000 tons of copper per year in the next five years. For the Peruvian projects, we have the Tia Maria project, which is a greenfield project. This project will use state-of-the-art SXEW technology with the highest international environmental standards to produce 120,000 tons of SXEW copper cathodes per year. Southern Copper has consistently promoted the welfare of the population of Islay province and Arequipa region. 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. As of July 1st of this year, the company has restarted activities at the Tia Maria in the province of Islay. the Arequipa region, and at the national level. We reiterate our view that Tia Maria will generate significant economic and social opportunities for this live province and the Arequipa region. In 2024, the company will, among other scheduled activities, install a live fence as well as 1,000 fox catchers. Southern Copper will also roll out air moving work this year. All these activities will generate 270 direct jobs in 2024 for the local population. In 2025, we expect to begin mine construction, which will generate 1,100 direct jobs. with workers from the East Light Province. When we start operations in 2027, the project will generate 600 direct jobs and an estimate of 4,800 indirect jobs. Our social programs in East Light total 6.3 million in the last two years. Our current programs promote a reduction in the cost of agricultural production by improving productivity with cutting-edge technology. Additionally, we're working to provide internet access to 4,600 school students. On top of this, we're committed to developing health facilities, high-performance schools, research centers, and roads in the Arequipa region via the War for Taxes mechanism. Tiamaria will generate significant revenues for the Arequipa region from day one of its operation. At current corporate prices, we expect to export $17,500 million and continue with $3,400 million in taxes and royalties during the first 20 years of operation. The company is currently reviewing its historical capital budget for Tia Maria of $1.4 billion. We will update this budget by year end. For Los Chancas project located in the Apurímac region in Peru, the company continues to coordinate efforts with the Peruvian authorities to eradicate illegal mining activities. 40,000 meters gather additional information on the characteristics of the Los Chancas deposit. For the Michiquillai project in the Cajamarca region of Peru, as of June 30th of this year, total advancement on the exploration project stood at 30%. We drilled 104,000 meters on a total program of 148,000 meters and obtained 33,991 core samples for chemical analysis. Diamond drilling is underway, which will provide data for cross-section interpretation, geological modeling, and resource evaluation. This month, we will begin hydrogeological studies, and in August, geotechnical studies will commence. We will also assess the results of metallurgical testing at the deposit in August. For environmental, social, and corporate governments, or ESG practices, We are glad to report that on August 1st of this year, the company will begin receiving eolic energy from the Phoenicia Wind Park, which is operated by Grupo Mexico Infraestructura. This will reduce our CO2 emission by approximately 250,000 tons per year, which is equivalent to 7% of Southern Copper's carbon footprint. Southern Copper recently published its Sustainability Development Report, significantly improving the granularity and specificity of information regarding our performance, commitment, and efforts in environmental, social, and governance areas. Our Buena Vista mine in Sonora, Mexico, has received the copper mark, the zinc mark, and the molybdenum mark certifications for responsible production, following a third-party independent evaluation of our performance in environmental, social, and government matters, including on this human rights. Consequently, all open-pit copper, zinc, and molybdenum production from our Mexican operation is currently certified by mark standards. For education, our IMPULSA program seeks to provide our workers in Mexico with opportunity to qualify for certification of obtaining of primary and secondary education and bachelor's degrees. From 2022 to date, more than 970,000 people, I'm sorry, 970 people have participated in this program and 430 have graduated. At present, there are 540 workers actively participating in IMPULSA. For human development, the sports advisor and coach of the Sonora Operations Swimming Team, Jorge Higa, qualified for the Paris 2024 Olympic Games after breaking the Mexican record for the 100 meter freestyle. Thanks to Mr. Higa's support, In 2024, 17 students from our academies participated in six top-level competitions. Dividend announcement. Regarding dividends, as you know, it is the company 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, on July 18th of this year, Southern Corporation announced a quarterly cash dividend of $0.60 per share of common stock and a stock dividend of 0.0056 shares of common stock per share. This is payable on August 26th of this year, 2024, to shareholders of record at the close of business on August 9th, 2024. Ladies and gentlemen, with these comments, we end our presentation today. Thank you very much for joining us. Now we would like to open the forum for questions.

Thank you. And as a reminder, you need to press star then 11 to get in the queue and wait for your name to be announced. To remove yourself from the queue, press star 11 again. One moment for our first question, please. And it comes from the line of Carlos de Alba with Morgan Stanley. Please proceed.