Southern Copper : SCC Conference Call 1Q23 transcript

Southern Copper Corp (1Q23 Earnings)

April 27, 2023

Corporate Speakers

• Raul Jacob; Southern Copper Corporation; Vice President, Finance Treasurer and
  CFO

Participants

• Carlos de Alba; Morgan Stanley; Analyst
• Isabella Vasconcelos; Bradesco BBI; Analyst
• Hernan Kisluk; MetLife; Analyst
• John Tumazos; Very Independent Research; Analyst
• Marcio Farid; Goldman Sachs; Analyst

PRESENTATION

Operator: Good morning and welcome to Southern Copper Corporation's First 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 first 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 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 statement 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 onto Mr. Raul Jacob.

Raul Jacob: Thank you very much, Carmen. Good morning everyone and welcome to Southern Copper's First Quarter 2023 Results Conference Call. 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 environmental, social, and governance. After this, we will open the session for questions.

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 Board Member.

Let's focus now on the copper market. In the first quarter of this year, the London Metal Exchange copper price decreased by 11% from the average of $4.53 per pound that we had in the first quarter of 2022. The average price has been $4.05 this past quarter.

The price reduction, which is slightly lower as we speak now, reflects concerns about a possible recession in the U.S. and Europe, and this has been partially offset by the good news on China's economy. Current copper prices are at around $3.90 per pound. And we believe the prices are being affected by the following factors. One is the reduction in global inflation, which may slow down or even stop the interest rate hike cycle led by the Fed and the ECB.

The bouncing back of the Chinese economy after its opening after the strong COVID measures that they had, China's GDP has been growing at 4.5%, which is slightly higher than the expected 4% that was mentioned by the major companies that follow the Chinese economy. We do have some uncertainty regarding future production growth in Chile and Peru. These two countries together represent about 40% of the global supply. And Chile recently reported a copper production decline of 4% for March of this year. Considering how demand and supply are evolving, the most relevant market intelligence houses for the copper market are currently expecting a market imbalance or small deficit of about 100,000 tons for this year.

This assumes a growth in demand between 2% and 2.5% and lower than expected supply growth estimated now between 1.5% and 2%. And this is basically due to the first quarter stoppages that we had in South America. Inventories are still very low, at about 411,000 tons as of March 31st. These are one of the lowest marks 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. In this scenario, we believe the current cycle of low prices will be short lived.

Now let's look at Southern Copper's production for the past quarter. Copper represented 77% of our sales in the first quarter of 2023. SCC's copper production registered an increase of 4% in quarter on quarter terms to stand at 223,272 tons. Our quarterly results reflect a 16% increase in production in Peru, mainly from the Cuajone operation that grew 48.5% and this was basically the result of much more mineral production in Cuajone. As you may recall, this operation was affected by an illegal stoppage in the first and second quarters of 2022.

So, coming back to operation and operating at full capacity now, Cuajone had much more mineral production and better ore grades and recoveries. That certainly helped this quarter's production. In the case of the Mexican operations, we had a drop in production of 2.4%, mainly coming from La Caridad. whose production decreased by 11% due to a temporary lower ore grade. For 2023, we expect to produce 940,000 tons of copper, an increase of 5% over the 2022 final print.

This growth will unfold as we get the Peruvian production at full speed which coupled with new production in our Mexican operations through our Pilares and Buena Vista Zinc concentrator projects. For molybdenum, it represented 11% of the company's sales value in the first quarter of this year and is currently our first by-product. Molybdenum prices average $32 per pound in the quarter compared to the $19 that they averaged in the first quarter of 2022. This represents an increase in price of 69%.

Molybdenum production decreased by 9% in the first quarter of this year, and this was mainly driven by a drop in production at the Toquepala mine due to lower ore grades. These results were partially offset by higher production at Cuajone, which increased its molybdenum production by 67%, and La Caridad, which increased its molybdenum production by 5%. These mines had higher ore grades, in the case of Cuajone, obviously more volume as well, and better recoveries for Cuajone.

As you know, molybdenum is primarily used to produce special alloys for stainless steel that require significant levels of hardness and resistance to corrosion and heat. New uses for this metal are associated with lubricants, sulfur filtering of heavy oils and shale gas production. Silver represented 4% of our sales value in the first quarter of 2023 with an average price of $20.53 per ounce in the quarter. This reflected a decrease of 6% in silver price. Silver is currently our second by-product.

Mined silver production increased by 3% in the first quarter of this year after production rose at Cuajone and Toquepala. This was partially offset by a decrease in production at the Mexican operations. Refined silver production fell by 12% quarter over quarter, mainly driven by a drop in production at our IMMSA refinery due to a temporary slowdown in purchases of third-party materials.

For Zinc, it represented 3% of our sales value in the first quarter of 2023 with an average price of $1.42 per pound in the quarter. This represents a decrease with regard to the first quarter of 2022 figure. Zinc mined production increased by 2% quarter on quarter and totaled 15,075 tons. This was driven primarily by an increase in production at the Santa Barbara and San Martin mines. Refined zinc production increased by 11% in the first quarter of this year.

For 2023, we expect to produce 116,000 tons of zinc, which represents an increase of 94% over the 2022 production level. This growth will be driven by the production startup of the Buena Vista Zinc operations that should contribute this year with 52,000 tons of more zinc production, and by the recovery of the IMMSA mines production where better ore grade areas have been identified. For next year and on, we expect to produce over 200,000 tons of zinc per year.

Financial results. For the first quarter of 2023, sales were $2.8 billion. This is $30 million higher than sales for the first quarter of 2022. Expansion was primarily fueled by an increase in the sales volume of copper that grew by 10%, silver grew 15%, and zinc 6%. This was partially offset by a decrease in the sales volume of molybdenum that decreased

by 8% in sales. Metal prices fell for most of our products with the exception of molybdenum that increased, as I mentioned, by 69%.

Our total operating cost and expenses increased by $146 million or 11% when compared to the first quarter of 2022. Main cost increments have been in inventory consumption, repair materials, explosives, reagents, sales expenses, diesel and fuel, and operations contractors. These cost increases were partially compensated by exchange rate differences, lower purchased copper, and other factors. When looking at our costs this past quarter, please keep in mind the following events.

The Cuajone mine illegal stoppage affected our first quarter 2022 production and costs. The Russian invasion to Ukraine, that started in February of last year, had an inflationary impact on costs that was mainly reflected after the first quarter of last year in the company's results. The first quarter adjusted EBITDA was $1,568 million, which represented a decrease of 7% with regard to the $1,678 million registered in the first quarter of 2022. The adjusted EBITDA margin was 56% in the first quarter of this year versus 61% in the first quarter of 2022.

Operating cash cost per pound of copper before by-product credits was $2.09 per pound in the first quarter of this year. That is 5.1 cents higher than the value for the fourth quarter of 2022. This 2% increase in operating cash cost before credits is a result of higher cost per pound from production, partially compensated by lower treatment and refining charges, lower administrative expenses, and higher premium on refined copper sales.

Regarding by-products, we had a total credit of $631 million, or $0.133 per pound, in the first quarter of this year. These figures represent a 16.3% decrease when compared with the credit of $806 million or $0.159 per pound that we had in the fourth quarter of last year. Total credits have increased for zinc and silver and decreased for molybdenum significantly and sulfuric acid.

Let me point out that we had an adjustment, a negative adjustment on open sales of molybdenum this past quarter of $265 million and that is compared to a positive adjustment on open sales at the closing of the fourth quarter of $141 million. So that is a main event that obviously affected our by-product revenues in this past quarter vis-a-vis the fourth quarter of last year. Southern Copper operating cash cost, including the benefit of by-product credits, was $0.75 per pound in the first quarter of this year.

This cash cost was $0.31 higher than the cash cost of $0.44 that we had in the fourth quarter of 2022. Of this increase, as I mentioned already, five cents came from higher cost per pound mainly due to lower volume and $0.26 came from lower by-product credits resulting, as I mentioned, from lower prices of silver and zinc and the very significant open sales adjustment, negative adjustment that we had on molybdenum sales in this first quarter.

Our net income in the first quarter of this year was $813 million, which represented a 4% increase when compared to a $784 million registered in the first quarter of 2022. The net income margin in the first quarter of this year was 29% versus 28% in the first quarter of 2022. Cash flow from operating activities in the first quarter was $1,185 million, which represented an increase of 44% over the $821 million posted in the first quarter of 2022, and an increase of 10% over the $1,082 million posted in the fourth quarter of last year.

For capital investments, our current capital investment program for this decade exceeds $15 billion and includes investment in 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 including key investments to bolster the competitiveness of El Arco project.

For the Mexican projects, let me start with the Buenavista Zinc concentrator in Sonora. As I said, this is a project located in the Buenavista deposit. We are building a new concentrator for zinc, and we are expecting this production facility to produce or to add 100,000 tons of zinc and 20,000 tons of copper capacity per year. When operating, this facility will double the company's zinc production capacity and provide more than 2,000 operational jobs.

Currently, the capital budget for the project is $416 million, most of which has already been invested and we are about to initiate operations this quarter, the second quarter. For Pilares, also located in Sonora, this is a former, or a brownfield mine that we acquired a few years back. It's located six kilometers away from La Caridad. And the project consists of an open pit mine operation with an annual production capacity of 35,000 tons of copper in concentrate.

The Pilares budget is $176 million, of which $114 million has been invested. The project is currently operating and delivering copper mineral oxide to the SX-EW facilities of the La Caridad operation. And we expect to produce mineral for the La Caridad concentrator at full capacity through the second quarter of this year. El Pilar, also in Sonora, is a copper greenfield project which is strategically located 45 kilometers away from the Buenavista mine. We anticipate that El Pilar will operate as a conventional open pit mine with annual production capacity of 36,000 tons of copper cathodes.

This operation will use highly cost efficient and environmentally friendly SX-EW technology. The budget for El Pilar is $310 million. The results from the experimental pads in the leaching process for El Pilar have confirmed adequate levels of copper recovery. Basic engineering study is finished, and the company continues to develop the project and engage in on-site environmental activities. The SX-EW plant detailed engineering is being developed on an ongoing basis and we expect production to begin in 2025 and mine life is estimated at 13 years.

For El Arco, located in the Baja California Peninsula, this is a world-class copper deposit located in the central part of the Baja California Peninsula. The project includes an open pit mine combining concentrator and SX-EW operations. Annual production is expected