Southern Copper - Q2 2023
July 28, 2023
Transcript
Operator (participant)
Good morning, welcome to Southern Copper Corporation's 2Q 2023 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 2Q 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. 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 US GAAP. Now I will pass the call to Mr. Raul Jacob.
Raul Jacob (VP, Finance, Treasurer, and CFO)
Thank you very much, Carmen. Good morning, everyone, and welcome to Southern Copper's Q2 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 review Southern Copper's key results related to production, sales, operating costs, 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 Q2 of this year, the London Metal Exchange copper price decreased 11% from an average of $4.32 per pound in the Q2 of 2022, down to $3.85 per pound at the close in average for the Q2 . This reflects concerns about the impact of a slowdown of 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, reflecting 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 of Peru, who had a 19% growth for the period January to May of this year. This is reducing the uncertainty on 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 that is affecting the copper market.
At the closing of March 31st-- or, or as of March 31st, the sum of the London Metal Exchange, the COMEX Exchange, the Shanghai Warehouse, and the bonded warehouses in China add 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 Q2 of 2023.
Copper production registered an increase of 9% in the Q2, in a 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 capacity-- full operating capacity of the Cuajone Mine, and higher ore grades at Toquepala. The return of the Cuajone at full, 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 3% on, in a quarter-on-quarter terms. For 2023, we expect to produce 932,000 tons of copper, an increase of 4% over the 2022 final print.
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 Buena Vista Zinc Concentrator projects. Molybdenum represented 11% of the company's sales value in the Q2 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 Q2 of last year. This represents an increase of 14%. Molybdenum production increased by 0.2% in the Q2, compared to the same period of 2022. This was mainly driven by an increase in production at the Cuajone, Caridad, and Buena Vista mines, due to higher ore grades at our Mexican operations and the 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 a decrease of 8% over our 2022 production level. Silver represented 4% of our sales value in the Q2 of 2023, with an average price of $24.26 per ounce in the quarter, which reflected an increase of 7%. Silver is currently our second by-product. Mine silver production increased 8% in the Q2 versus the same period of 2022, after production rose at all our operations. Refined silver production fell by 31% quarter-on-quarter. This was mainly driven by a drop in production at our INSA 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 Q2 of 2023, with an average price of $1.15 per pound in the quarter, which represents a 35% decrease with regard to the Q2 of 2022 figure. Zinc is currently our third by-product. Zinc mine production increased 14% quarter-on-quarter and totaled 17,223 tons. This was driven primarily by an increase in production at the Santa Barbara and Charcas mines.
Refined zinc production increased by 10% in the Q2, vis-a-vis the Q2 of last year. For 2023, we expect to produce 108,000 tons of zinc, which represents an increase of 80% over our 2022 production level. This growth will be driven by the production and startup of the Buena Vista Zinc Concentrator, and by the recovery at the INSA mines, where better ore grade areas have been identified. For 2024 and on, we expect to produce over 200,000 tons of zinc per year. Financial results. For the Q2 of 2023, sales were $2.3 billion. This is almost the same that we sold in the Q2 of 2022.
Copper sales volume increased by 12%, while value decreased 1% in a scenario of prices lower by 11%. Regarding our main by-products, we reported higher sales of molybdenum that grew 28% due to better prices. Zinc sales, in turn, were down 22%, due mainly to, due to lower prices, because we had a volume increase of 13% in silver, excuse me, on zinc sales. 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 Q2 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. Should be noted that year to date, we registered unit cost reductions for grinding media, explosives, and power costs. Our Q2 of 2023 EBITDA was $1,115 million, which represent an increase of 9% with regard to the $1,021 million registered in the Q2 of last year. The EBITDA margin in the Q2 stood at 48% versus 44% in the Q2 of 2022. EBITDA in the six months of this year was $2,683 million. This is 1% lower than the same than the EBITDA for the six months of 2022.
The EBITDA margin in the 6 months of this year stood at 53%, which was the same as the 2022 mark. Operating cash costs per pound of copper before by-product credits was $2.19 per pound in the 2Q of this year. That is $0.10 higher than the value for the 1Q of this year, which was $2.09. Even though copper production volumes increased 2% between the 2Q and the 1Q, a 5% increase in operating cash cost is attributable to higher cost per pound from production cost, treatment and refining charges, and to lower premium. Regarding our by-products, we had a total credit of $517 million, or $1.07 per pound, in the 2Q of 2023.
These figures represent a 20% decrease when compared to the credit of $631 million, or $1.33 per pound, that we had in the Q1 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 the, all of our by-products. Southern Copper operating cash cost, including the benefit of by-product credits, was $1.12 per pound in the Q2 of this year.
This cash cost was $0.36 higher than the cash cost, cash cost of $0.76 registered in the Q1 of 2023, and as you have noticed, mainly we had a $0.05 increase in, in cash cost, a 5% increase in operating cash cost, but a significant reduction in by-product credit, and that basically explains the main change that we have in the cash cost. 2023 net income was $547 million, which represent a 27 increase with regard to the $432 million registered in the Q2 of 2022. The net income margin of the Q2 stood at 24% versus 19% in the Q2 of 2022.
This increase was mainly the result of a 7% reduction in operating costs, which was 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 Q2 of 2023 net income fell below the $813 million reported in the Q1 of 2023. This dynamic reflects significant differences in copper prices in the period-over-period comparison. In the Q2 of 2023, copper sales dropped $365 million due to lower price. That alone represented an adjustment of $213 million. Volume decreased 4%, volume of sales the, or sales volume, I should say, decreased by 4%, and that's another $92 million.
We had an adjustment, 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 sales volumes, and we are expecting that, looking at our current operation plans, the ramping up of the new zinc concentrator in Buena Vista and the Pilares project, 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. An uptick in production for copper, zinc, and silver in the second half of the year should, should support our sales through this period. Cash from operations.
Cash flow from operating activities in the six months of this year was $1,982 million, which represents an increase of 75% over the $1,131 million posted in the six months of last year. Cash flow in the first half of last year was affected by a significant reduction in working capital, which was attributable to the Cuajone Mine stoppage. Our current capital investment program for this decade exceeds $15 billion and includes investments in the Buena Vista 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 the El Arco project.
Since there is a short description of our main capital project in, projects in FTC's press release, I'm going to update new developments for each of them. For the Mexican projects, in the case of the Buena Vista zinc concentrator in Sonora, this is a project that is located within the Buena Vista deposit, where, as you know, 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 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 the experimental paths in the leaching process have confirmed adequate levels of copper recovery. 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.
For 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 Manifestación de Impacto Ambiental, MIA, to the Secretariat of Environment and Natural Resources, SEMARNAT, to request the respective environmental impact permits. The company is currently preparing studies for the port, power pipelines, town sites, and auxiliary services. 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've also promoted agriculture 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 30th of this year, part of the project's land continued to be occupied by illegal miners, about 75 of them, who of those persons have irregularly registered their stakes in the Internal Registry of Mine Informalization, known as REINFO. The company requested, and the authorities subsequently ordered, that the aforementioned miners be excluded from REINFO and be qualified as illegal miners. The company has also filed criminal complaints and other legal remedies to physically expel the illegal miners from the project and confiscated illegal mined ore. The third project that we have in Peru is the Michiquillay project in the Cajamarca region.
In 2023, in accordance with our social agreements with the Michiquillay and La Encañada community, the company has hired unskilled labor and is paying for the use of surface land. We're also supporting social programs in both communities. In addition, we continue exploration activities on this project, and currently, we have installed 10 drilling platforms. Excuse me, please. For environmental, social, and governance, or ESG, investments, Southern Copper is committed to improving its ESG record by adopting best practices and informing the investing- the investment community and other stakeholders about our progress in these matters. For risk prevention and management of risk, by the Q2 of the year, all of Southern Copper's operating units had hit 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 system and reflect our alignment with best international practice. The aforementioned 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 the 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, the Q2 of this year, we reforested 464 hectares in the state of Sonora in Mexico. This represents 10 times the area affected in the period. With this effort, we have successfully met an objective set 2 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 reforest area totaled 934 hectares, which is 5.6 times the affected area year-to-date. The implementation and promotion of best practices, such as the aforementioned, has helped Southern Copper secure and maintain a place on the S&P Peru General ESG Sustainability, Sustainability Index of the Lima Stock Exchange.
On April 28, 2023, Grupo México issued its 2022 sustainability development annual report, which includes detailed information about Southern Copper's efforts on the social, environmental, and corporate governance fronts. 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 via our community well-being program, which we conducted a health campaign to prevent breast and uterine cancer. SCC has been recognized by the Peruvian state agency, ProInversión, for its execution of a drinking water and rural sanitation program in Poblado Yacango, District of Torata. This project, which has benefit 137 families, entail an investment of $2.8 million.
Similarly, in Mexico, we invested $5.6-- $5.7 million this quarter to improve water distribution in Nacozari and Cananea, benefiting 53,800 residents. The youth orchestra promoted by Southern Copper were recognized at the Mexican Polymetallic Seminar in 2023. This orchestra support 1,646 students in Mexico and Peru. Additionally, in collaboration with the Instituto de Cultura del Estado, we held our first exhibition of a traveling workshop for documentary film at the Cineteca in the state of Sonora in Mexico. During this event, 17 original short films were screened. They were produced by some of the 747 students from communities that participated in the workshop.
Regarding dividends, as you know, it is the company's 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, as announced to the market on July 20th, the board of directors authorized a cash dividend of $1 per share of common stock, payable on August 23rd, 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.
Operator (participant)
Thank you. Ladies and gentlemen, to ask a question, please press S 11 on your telephone and wait for your name to be announced. To withdraw the question, please press S 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Matthew Murphy with Barclays. Please proceed.
Matthew Murphy (Analyst)
Hi, Raul. Thanks for your for your comments on the projects in the pipeline. I'm interested in Peru, your take on, you know, the situation. I guess we've seen the economy in contraction, but we've also seen a bit less disruption to the mining sector. I guess the first part of the question is: Are you seeing improvement in, you know, the mining sector's ability to operate in Peru? The second part of that is just the implications for Tia Maria. You know, 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? If nothing changes, could this project still be going forward in 2024?
Raul Jacob (VP, Finance, Treasurer, and CFO)
Okay, let me... Thank you for your question, Matt. Well, first, let me say, as a general concept, that social circumstance have improved in Peru. Politically speaking, we are seeing also a significant improvement. The police is doing their activities and working with the companies to solve the problems that we have that require their intervention. In other cases, where such as the case in Tia Maria. We are working with the local population. We believe that we have been making progress on this matter. Basically we're relatively much more optimistic than what 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%. That is basically comparing a normal operation, plus Quellaveco, with last year, where we had, in May, we had Las Bambas stoppage and the production at Cuajone coming back, but not as strong as we were anticipated at that time. In general terms, circumstances have improved. We're seeing Tía María moving forward slowly, but doing so.
Matthew Murphy (Analyst)
Okay, thank you.
Operator (participant)
Thank you. One moment for our next question, please. As a reminder, that is S one one to get in the queue. It comes from the line of Jens Spiess with Morgan Stanley. Please proceed.
Jens Spiess (Research Analyst)
Yes, thank you all for taking my question. I just wanted to ask on cash cost, guidance for 2023, what do you expect before byproducts, for the year? Thank you.
Raul Jacob (VP, Finance, Treasurer, and CFO)
For the Q2, we're expecting a better cash cost than what we have had in the first part of the year, and the reason for that is twofold. We're seeing some cost reductions. I mentioned grinding media, explosives, and some other materials. But on top of that, we have more production of copper for the second half of the year. That should improve our cost per pound before byproduct credits. We should have more credits coming from the volumes, the much better volumes, that we're expecting for the second half of the year that I mentioned while doing the company presentation.
Jens Spiess (Research Analyst)
Okay. Thank you. Just to clarify, for silver, you expect 20.1 million ounces for 2023? Is that what you said?
Raul Jacob (VP, Finance, Treasurer, and CFO)
Yes, I, let me, let me repeat the, let me repeat the, the volumes that, that I mentioned. For the second half, we're expecting to produce 481,300 tons of copper, 1,400 tons of molybdenum, 76,000 tons of zinc, and 10.9 million ounces of silver. That's for the Q2. I believe that your question was specifically for silver production for the year, right?
Jens Spiess (Research Analyst)
Yeah.
Raul Jacob (VP, Finance, Treasurer, and CFO)
For the year, for silver, we're expecting 20.1 million ounces of silver.
Jens Spiess (Research Analyst)
Okay, perfect. Last one. Are you factoring in any commercial production from Buena Vista Zinc for this year, or will be it coming online until next year, mainly?
Raul Jacob (VP, Finance, Treasurer, and CFO)
No, no, we're expecting to increase, our zinc production coming from the new, concentrator in Buena Vista for about 43,000 tons of zinc.
Jens Spiess (Research Analyst)
43? Okay, perfect.
Raul Jacob (VP, Finance, Treasurer, and CFO)
Forty-three.
Jens Spiess (Research Analyst)
Right.
Raul Jacob (VP, Finance, Treasurer, and CFO)
Yes. Which by, by the way, will come in with a very, very competitive free cash cost, given the fact that the copper production of Buena Vista will be absorbing the fixed cost, this production will, will basically enter our cost system at a very, very competitive value.
Jens Spiess (Research Analyst)
All right. Thank you.
Operator (participant)
Thank you. One moment for our next question, please. It comes from the line of Arthur Biscuola with Santander. Please proceed.
Arthur Biscuola (Research Analyst)
Hi, thank you for taking my question. Just follow up on production. Your guidance is to reach a total copper production of roughly 8, 8, 400 and, and 80,000 tons in the second half. You know, what will be the main risk for the company to not reach this guidance? I mean, what is worth being patient here? Also, what to expect in terms of third-party volumes into year-end? Thank you.
Raul Jacob (VP, Finance, Treasurer, and CFO)
I'm so sorry, Arthur, I couldn't get the second part of your question. Could you repeat, please?
Arthur Biscuola (Research Analyst)
Yeah, sure. I just want to know what to expect in terms of third party volumes into your end.
Raul Jacob (VP, Finance, Treasurer, and CFO)
For the second half?
Arthur Biscuola (Research Analyst)
For copper.
Raul Jacob (VP, Finance, Treasurer, and CFO)
We, we don't.
Arthur Biscuola (Research Analyst)
For-
Raul Jacob (VP, Finance, Treasurer, and CFO)
Yes, copper.
Arthur Biscuola (Research Analyst)
Yes, for the second half.
Raul Jacob (VP, Finance, Treasurer, and CFO)
Copper. Yes, copper purchase from third parties will be basically zero. We are long in copper concentrates now. We want to process 100% of our copper in our, in, in our own smelters.
Operator (participant)
Arthur, does that answer your question?
Arthur Biscuola (Research Analyst)
Okay, thank you.
Operator (participant)
Okay.
Arthur Biscuola (Research Analyst)
Yeah, thank you.
Operator (participant)
Thank you. Mr. Jacob, I don't see any further questions. I will pass it back to you for any final comments.
Raul Jacob (VP, Finance, Treasurer, and CFO)
Okay, thank you very much, Carmen.
Operator (participant)
There's one more that just showed up, if you wanna pick it up.
Raul Jacob (VP, Finance, Treasurer, and CFO)
Please, please.
Operator (participant)
Okay, one moment, please. It does come from the line of Matheus Moreira with Bradesco BBI. Please go ahead.
Matheus Moreira (Analyst)
Hi, thank you for having my question. Are you hearing me?
Operator (participant)
Yeah, I can hear you loud and clear.
Matheus Moreira (Analyst)
Okay, thanks. You mentioned copper production for this year at about 999,000 tons. Do you also have a guidance on copper production for next year and onwards? Thank you.
Raul Jacob (VP, Finance, Treasurer, and CFO)
Oh, sure. Thank you very much for your question, Matheus. For this year, I'm going to repeat the, the, the goal for the year for a full 2023 for all the metals, the relevant ones that we produce. For copper, we're-- for 2023, we're expecting to produce 932,000 tons. For molybdenum, 24.2 thousand tons. For zinc, 108,000 tons. Silver, 20.1 million ounces. With that, our expectation is that we should have a, a cash cost slightly lower than what we're seeing. Well, obviously, this is a continuing of by-product prices. Volumes, we know that we will be better in zinc and silver than what we were last year. I'm talking about the byproducts.
For copper, obviously, there is a 4% expected growth in production vis-a-vis 2022. For next year. For next year, we will have the positive full benefit of the zinc concentrator that has we expect to produce about 120,000 tons of zinc coming from the Buena Vista Zinc Concentrator. That's for next year. In total, for zinc, next year is going to be 108,000 tons. I'm sorry, 207-- 208,000 tons. Let me please let me correct that. What I just said is 2,080,000 tons for... 208,000 tons for zinc. For silver, next year, it's going to be 27 million ounces. For molybdenum, 26,300 tons.
For copper, 1,026,000 tons. Let me repeat the forecast for 2024 at this point. For copper, 1,026,000 tons, 1,026,000 tons. For molybdenum, 26,300 tons. For zinc, 208,000 tons. For silver, 27.1 million ounces, and that's basically it.
Matheus Moreira (Analyst)
Okay, thank you very much. That's super clear.
Raul Jacob (VP, Finance, Treasurer, and CFO)
Thank you very much, Matheus.
Operator (participant)
Thank you. I am not showing any further questions, sir.
Raul Jacob (VP, Finance, Treasurer, and CFO)
Okay. With this, we conclude our conference call for Southern Copper's Q2 of 2023 results. We certainly appreciate your participation and hope to have you back with us when we report the third quarter of this year's results. Thank you very much, and have a nice day.
Operator (participant)
Thank you. With that, ladies and gentlemen, we thank you all for participating, and you may now disconnect.