Jul 24, 2013
Executives
Raúl Jacob Ruisánchez – Vice President-Finance and Chief Financial Officer Oscar Gonzalez Rocha – President and Chief Executive Officer Daniel Muñiz Quintanilla – Chief Financial Officer-Grupo Mexico
Analysts
Santiago Pérez-Teuffer – Credit Suisse Thiago Lofiego – Merrill Lynch SA CVTM Leonardo A. Correa – HSBC Carlos F.
De Alba – Morgan Stanley & Co. LLC Marcelo Aguiar – Goldman Sachs Marcos Assumpção – Itaú BBA Autumn Graham – Barclays Capital, Inc.
Alfonso Salazar – Scotiabank Mandeep Singh Manihani – JPMorgan Securities LLC Pedro Fuenzalida – Larrain Vial SA Corredora de Bolsa
Operator
Good morning and welcome to the Southern Copper Corporation’s Second Quarter and Six Months 2013 Results Conference Call. With us this morning, we have Southern Copper Corporation’s Mr.
Raúl Jacob, Vice President of Finance and CFO, who will discuss the results of the company for the second quarter and six months 2013, as well as answer any questions that you might have. Key information discussed on today’s call may include forward-looking statements regarding the company’s results and prospect, which are subject to risks and uncertainties.
Actual result may differ materially and the company cautions do not 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.
Our results are expressed in the form of U.S. GAAP.
Now, I will pass the call on to Mr. Raúl Jacob.
Raúl Jacob Ruisánchez
Thank you very much, Trisia and good morning everyone and welcome to Southern Copper’s second quarter 2013 earnings conference call. Participating in today’s conference are Mr.
Oscar Gonzalez Rocha, Southern Copper CEO and Mr. Daniel Muniz, Grupo Mexico’s CFO.
In today’s conference call, we will begin with an update of our review in the metal markets. We will then talk about Southern Copper’s key results related to production, sales, operating costs, financial results, expansion projects and capital spending program.
After that, we will open the session for questions. Focusing on the metal markets, during the second quarter of 2013, metal markets continued to be driven by some negative macroeconomic events that affected consumer expectations.
The most important ones for basic metals was the slowdown of China’s economy and the continuing low consumption in Europe. Regarding the copper market, despite some fundamentals for this market, we maintain our view that it’s being affected by concerns about the Chinese growth, London Metal Exchange increases, the stock increases, macroeconomic worries related to the end of that quantitative easing in the U.S.
and Europe’s continuing economic crisis. Of these factors, the increments in the London Metal Exchange and other warehouses inventories are creating some concerns regarding the copper market balance.
We believe this is part of the commodity cycle and a temporary event. We expect, in the following quarters, a recovery of demand, particularly from Asia, which currently represents approximately 60% of the world demand.
Regarding China, its GDP is growing at a rate of 7. 5% per year, generally speaking, due to its urbanization process, we believe that China's GDP growth produces a corporate demand growth higher than its GDP growth rate.
We expect this trend to start up again in the next few quarters, as China ends its de-stocking phase. Even though today, the U.S.
represents only 8% of the world demand for refined copper, the ongoing recovery of its economy is a key to copper demand, seems that U.S. is the most important secondary copper consumer market, affecting copper demand in other economies.
On the supply side, despite some evidence of a market oversupply, we think that several structural factors, such as labor stoppages, technical problems, truck shortages and other issues are affecting and will affect copper supply, reducing the net impact of additional production coming from new projects and expansions. Southern Copper believes that if the world economy continued to improve, it is positioned to take advantage of the positive future outlook of the copper market through its aggressive investment program of organic growth aimed at increasing production from its current capacity to 1 million tons by 2017.
Focusing on Southern Copper, copper production, this quarter production decreased by 13,116 tons or 8.2% compared to the second quarter of 2012. That was due to a lower ore grade and recovery at our Toquepala mine and lower ore grade at our Buenavista mine.
In the case of Buenavista, this was caused by a temporary flood disruption that is being resolved. The lower production levels of these operations were partially offset by higher throughput and ore grade and consequently more copper production at our Cuajone mines.
Due to the lower production at Buenavista, for 2013 we are reducing our current production guidance to 640,000 tons of copper. Of these, approximately 620,000 tons will come from our mines, and 20,000 tons will come from third-party copper concentrates profits at our metallurgical facilities.
Regarding molybdenum production, molybdenum production decreased by 195 tons or 4.2% in the second quarter of 2013 when compared to the same quarter of last year. This was due to lower production at La Caridad that decreased 7% and Toquepala that decreased production by 3%.
The construction of the first molybdenum plant for the current Buenavista concentrator is completed and is starting commercial production. It is expected to have an average annual production of 2000 tons of molybdenum.
The plant had a total budget of $38 million and we are in line with this budget at this point. For 2013, we plan to produce 18,800 tons of molybdenum, 3% more than our 2012 production including approximately 700 tons from the Buenavista new molybdenum plant.
Regarding silver production, it decreased by 4.1% in the second quarter when compared with the second quarter of 2012. This was the result of lower production at Buenavista and the Peruvian operations.
Refined silver production increased by 21.7% in the second quarter to 4.3 million ounces from 3.5 million ounces in the second quarter of 2012. Zinc production increased by 21.7% in the second quarter of this year mainly as a result of higher grades and recoveries as well as full production recovery of the Santa Eulalia mine after the flooding problems of prior years were completely resolved.
Focusing on our financial results for the second quarter of this year, sales were $1.4 billion, $249.7 million lower than sales for the second quarter of 2012. Copper sales decreased by 7.1% in volume and 9.2% in price.
Regarding byproducts, we have better volume sales of silver had increased 4.7%, zinc that increased 6.7%, that partially compensated lower prices for gold. Regarding molybdenum, volume decreased by 3.1% and price by 21%.
Operating costs, our total operating costs and expenses increased by $60.6 million or 7.7% when compared to the same quarter of last year. The main cost increments were in depreciation, selling, general and administrative, diesel and fuels, energy and labor and other operating materials.
These cost increases were partially offset by lower exploration cost, mining royalties, workers' participation, purchase copper, sales expenses and reachable materials. Our EBITDA for the second quarter was $675 million, 48% margin compared with $972 million, a 59% margin for the second quarter of last year.
Focusing on our cash cost, operating cash cost per pound of copper before by-product credits was $2.1 per pound in the second quarter of 2013. This figure compares with $1.99 per pound in the first quarter of this year.
$0.11 per pound increasing operating cash cost is a result of the already mentioned cost increments. Southern Copper’s operating cash cost including the benefit of by-product credit was $1.09 per pound in the second quarter of 2013.
Regarding by-products, we had a total credit of $320 million or $1.01 per pound in the second quarter of 2013. These figures compare with the credit of $346 million or $1.08 per pound in the first quarter of this year.
Increased volumes for silver, zinc, and sulfuric acid have been offset by lesser volumes of molybdenum and gold. While all by-product prices have decreased between the second quarter and the first quarter credit have diminished most for molybdenum, silver and sulfuric acid and maintain equal for zinc.
Net income in the second quarter was $374.1 million that is 26% of sales. Net income attributable to SCC shareholders in the second quarter of this year was $372.7 million, 26.4% of sales or diluted earnings per share of $0.44.
Focusing on our expansion and capital projects and before we go into the details, let me share with you that in light of the current market volatility, the company recently conducted a review of our capital investment program vis-à-vis the cash flow generation capacity of SCC in different price environments. As a result of this review, we conclude that we have sufficient funds to finish our current capital projects even in a conservative low-price scenario of $2 per pound of copper.
So we are moving forward with our capital programs at full speed and we're expecting to finish with our projects as indicated to the market at this point. Capital expenditures in the quarter were $385.5 million, 67% higher than our second quarter of 2012 and represented 103% of net income.
As reported before, our current plans aim to increase copper production capacity by approximately 84% from the current guidance that we just gave of 640,000 tons for this year to 1,175,000 tons by 2017. The current status of our major capital expenditure projects is as following.
Buenavista projects, we continued the development of our $3.1 billion investment program at this unit, which will allow us to increase its copper production capacity by approximately 170% from 180,000 tons to 488,000 tons by 2015, as well as an increase in our molybdenum production. I already mentioned that we just finished the construction of the first molybdenum plant for Buenavista operation and we are expecting production for a commercial production for this plant in the third quarter of this year.
The new concentrator, so that’s the second concentrator that Buenavista mine will have, with a molybdenum circuit that's another molybdenum plant, that investment includes a concentrator with an estimated annual production capacity of 188,000 tons of copper, and as I said, the second molybdenum plant with 1,850 ton capacity. The project will also produce annually 2.3 million ounces of silver and 21,000 ounces of gold.
The total capital budget for the project for this new concentrator on molybdenum circuit is $1.384 billion and through June 2013 it has a progress of 51% with an investment of $302 million. The project is expected to be completed in the first half of 2015.
The SXEW III project is moving forward with an overall progress of 62% at June 30, 2013. An acceleration plan adopted in the first quarter of this year is expected to allow us finish the project ahead of the scale and under budget.
The total capital budget of the project is $444 million of which we have spent already $218.4 million through June 30. The project production capacity is 120,000 tons of copper capitals per year and it is expected to start operating in the second quarter of 2014.
The Quebalix III facility achieved its full capacity in the second quarter of 2013. The project construction was completed in February, and it started operations in March 2013.
This project will allow crushing up to 15 million tons of mineral per year, improving the SXEW copper production by increasing recovery and hauling cost and the necessary time to extract copper from mineral. The project was completed as scheduled and as budgeted with a total cost of $76 million.
As you may have note, the total capital budget for Buenavista has increased from $2.8 billion to $3.91 billion. This variance is a result of inclusion of our new project, the Quebalix IV with a capital cost of $240 million.
Both of those, we are expecting to spend $48 million in 2013. Regarding our Toquepala projects, through June 30, 2013, we have spent a total of $257.7 million on the Toquepala projects.
As part of these projects include the construction of a new in-pit crusher and conveyor belt system to replace current mine rail haulage, which we expect will reduce operating cost by approximately $5.5 million per year. Regarding the Toquepala expansion, which is expected to increase average annual production by 100,000 tons of copper and 3,100 tons of molybdenum, we continue negotiations with local communities and authorities as part of the process to obtain the project approval.
In second quarter of this year we made a contribution of S/.45 million, which is approximately $16 million to the development fund of the Candarave province and, together with its authorities, we are selecting what development projects will be built. Regarding Cuajone projects, through June of this year, we have spent $142.4 million of a total budget of $157 million on two projects to increase productivity through technological improvements in this unit; the Variable Cut-off Ore Grade project and the high-pressure grinding roll project.
Actual production is already showing the results of the variable cut-off ore grade project, which has been completed at a cost of $112 million. A high-pressure grinding rolls project, which will produce a more finely crushed material, is expected to start operations in the fourth quarter of 2013 and will allow us higher copper recovery and cost savings by reducing power consumption in the crushing process.
The total project budget in this case for the high-pressure grinding rolls is $45 million of which we have already spent $30 million. We expect that both projects will be at full capacity by the end of the fourth quarter of this year, increasing annual production by 22,000 tons of copper and 700 tons of molybdenum.
On April of this year, the Board approved $65.1 million for the acquisition of mine equipment to improve slope stability at the south area of the Cuajone mine. This project will remove approximately 148 million tons of waste material in the upper level of the mine in order to improve the mine design without reducing our actual production level.
Mine equipment to be acquired includes one shovel, five trucks, one drill and auxiliary equipment. Besides preparing the mine for the future, with this investment, the Company will avoid a reduction in average ore grade between 2014 and 2018, while maintaining current production levels.
By June of this year, we have committed $62.1 million for the acquisition of this equipment. Looking at our capital expenditures for the year 2013 at this point we are adjusting it, reducing it from the initial guidance of $1.8 billion to $1.6 billion.
Regarding dividends, as you know, it is the company policy to review at each board meeting the capital investment plan, cash resources and expected Q2 cash flow generation and operations. That is done in order to determine the appropriate quarterly dividend.
Accordingly as disclosed to the market on July 18 of this year, the board of directors authorized a cash dividend of $0.12 per share of common stock payable on August 20, 2013 to shareholders of record at the close of business on August 7, 2013. With this in mind ladies and gentlemen thank you very much for joining us.
And I will like to open up the forum for questions.
Operator
Thank you. (Operator Instructions) Our first question comes from Santiago Pérez-Teuffer from Credit Suisse.
Please go ahead.
Santiago Pérez-Teuffer – Credit Suisse
Hi good morning Raúl, Daniel, and Oscar and thanks so much for your time. I have two questions, the first one is related to Buenavista, is the floor affecting mine, still affecting productions currently, and do we care effect on this quarter?
Raúl Jacob Ruisánchez
Okay. Let me focus on the Buenavista production profile.
We have identified the source of the flooding and we are already correcting that. By the end of this month July, we expect to have a major control on the production of Buenavista.
If we achieve that, production should go back to the plan that we have for the year that was to produce about the same that we did in last year in Buenavista. However the tons that are already lost will not be recoverable through 2013.
Regarding the Toquepala investment, let me ask Mr. Oscar Gonzalez to comment on it please.
Oscar Gonzalez Rocha
Yes. In the Toquepala investment we are just investing right now in the order of $85 million for the year that include the improvement in the technological arrangement in order to substitute this railroad with the [companion] on the new grinding equipment.
And that too in addition that is what is going to reduce the $5.5 million that was mentioned. And this will be used later on by the expansion of Toquepala, mainly the [companion] and with the addition of another second grinding equipment.
The [other pin] that is involved in the investment is the new chops for the talks and the auxiliary equipment because the whole chop was inside the expansion of the mine, and for that reason we need to construct a new one and that is $26 million for this year. And the other pin is the new warehouse and some solicitation that we’re going to build.
That made the $75 million, $80 million for this year, but we are not spending anything in the new expansion of the Toquepala for producing 100,000 tons until we have the approval of the community and of the government of the environmental impact study.
Santiago Pérez-Teuffer – Credit Suisse
Oscar, if I may as a follow-on, what is needed for this approval, looking only at published theory or you just have to submit another AIA and when will you expect to do this? Thanks so much.
Oscar Gonzalez Rocha
No, the AIA is already submitted since last year and the only thing that we will need to do again because we’ve canceled is the public hearing and that we expect to have it maybe in this third quarter of this year in order that we can start construction after the approval by the Minister (inaudible) maybe at the beginning of the year because we already have all the engineering for this project.
Santiago Pérez-Teuffer – Credit Suisse
Thanks so much and good morning to everyone.
Raúl Jacob Ruisánchez
Thank you very much for your questions, Santiago.
Operator
Our next question comes from Thiago Lofiego from Merrill Lynch. Please go ahead.
Thiago Lofiego – Merrill Lynch SA CVTM
Hi, good afternoon. I have two questions.
First one, on the projects in Peru, if you could give your view on how this stricter regulations in Peru might affect your upcoming projects, and also if you could give an update on the potential timing for the Toquepala and Cuajone projects. Those would be nice if possible.
Raúl Jacob Ruisánchez
No, regarding the Toquepala we just mentioned that it will be – we expect to have the project moving forward with the – find the audience in the third quarter and with the initial construction of the project by the first quarter of next year. About the new environmental standards, well we have expressed our concern and then standardize, lowest in the word at this point.
And I think that it is something that will affect investments in metallurgical facilities, in copper metallurgical facilities specifically in Peru. But currently we don't have any specific plans to spend our smelter or refinery.
So it's mainly – we’re expecting a correction in the standard because we think that these are unrealistic.
Thiago Lofiego – Merrill Lynch SA CVTM
?
Raúl Jacob Ruisánchez
Yeah, well we have the Toquepala project that really was comment and the Tia Maria project. In the Tia Maria, we're working on the environmental impact study that requires a certain work with the communities before we submit it to the government and we're on that phase and at the same time in parallel, doing work with the local communities for getting the approval of the project.
Thiago Lofiego – Merrill Lynch SA CVTM
Okay. Thank you.
And my last question is about the cost outlook, we have seen some cost pressures over the last couple of quarters. What’s the outlook going forward, should we see a normalization of the operating cost or what’s – the outlook there.
Raúl Jacob Ruisánchez
What we’re seeing that in the last few months, the total cost in dollars, is decreasing given the reduction in certain costs. However, that’s very dependent on what happens with the fuel cost which is very important for us.
And energy, meaning by diesel, electricity, electricity were reducing our cost, we expect to reduce our cost of the Mexican operations due to the PTA that the company have signed with the new plants constructed by Grupo Mexico, that will supply power to the company. We generally speaking, we’re not seeing that much cost pressures as we have seen since a year-ago, at the same time and that is something that we believe will be favorable.
Thiago Lofiego – Merrill Lynch SA CVTM
Great. Thank you.
Raúl Jacob Ruisánchez
You’re welcome.
Operator
Our next question comes from Leonardo Correa from HSBC. Please go ahead.
Leonardo A. Correa – HSBC
Hi, good morning and good afternoon everyone. Thank you.
My first question is regarding hedging. We’ve seen the company in the past hedging on part of copper production.
I just wanted to know, I mean given recent volatility in copper price has ran potentially more volatility going forward, at least for the next two years. I just wanted to know if hedging part of copper production would be an option?
And my second question is regarding M&A and clearly the company has been very focused on organic growth. Has a very interesting pipeline of projects, I just wanted to understand given recent Tier 1 assets that have been put up for sale and mainly improve on the copper side, I just wanted to understand what the recent spends on M&A is now from the company.
Thank you, guys. Those are different questions.
Raúl Jacob Ruisánchez
Okay, let me ask Daniel Muniz to comment on your question. Thank you very much for it Leonardo.
Daniel Muñiz Quintanilla
Sure, thank you Leonardo. Well, first of all regarding testing as you know, I mean, in the past we don't have a real policy in sense of hedging.
We tended to pitch this different, look at the markets, do our analysis, look at our cash flow and CapEx, and the financial structure and capital per share for the company and the sites that you hedge at some point. We have not hedged growth drivers and we believe in the strong fundamentals of copper.
Where we commented, we've seen a lot of different inflows from China and which I believe, we do believe in the fundamentals. We are experiencing how tough it is to put additional accounts of copper out there, so we were passing the bill.
We have not decided to hedge. Regarding M&A, I mean, in the quarter we were seeing a lot of targets coming through these, I mean, probably it’s part A.
There a lot of benchmarks like (inaudible) since it wasn’t commented. Then the other part is that’s our addressable sales we have been targeting on organic growth.
We believe given the strong asset base of Southern Copper and having a strong position in cash cost of the industry. It's difficult to close the transaction until we acquire another asset given our pipeline.
As far as the brown fill projects that we're going through, but the projects comes in the way and to us and to our shareholders of credit, we were definitely we are entertained the analysis, the due diligence et cetera, but nothing to report at this point. Thank you for the questions.
Leonardo A. Correa – HSBC
Okay, very clear. Thank you very much.
Raúl Jacob Ruisánchez
Thank you.
Operator
Our next question comes from Carlos de Alba from Morgan Stanley. Please go ahead.
Carlos F. De Alba – Morgan Stanley & Co. LLC
Thank you very much gentlemen. My first question is regarding cost again, I mean, it was particularly concerning to see the operating cash cost of by-products jumping to $2.10 per pounds.
But I would like to understand, if you can quantify the impact of the Buenavista situation adding this increase, can you tell us how much either on a profound basis or on a dollar basis, it increased your cost in the second quarter?
Raúl Jacob Ruisánchez
Well, all in total Carlos we lost about 5% of our production related to the Buenavista copper production. The concern, is that even though we did reduce our production by about 5% directly from Buenavista, is that we still spend pretty much the same amount of money in terms of the total expenses related to copper production at that site.
So it was spending pretty much the same with less production. What we are seeing is it’s a mix of different elements.
I already mentioned some of them when we talked about the change in costs, and the foreign effects. Let me give you some more details.
In terms of diesel and fuel, we had a cost increase of $8 million in the quarter. Power was about $7 million.
On power, I forgot to mention that we are adjusting our cost improved through consumption of lower power as well as fuel. In Mexico we’re expecting a reduction coming from the new tariff that we will pay when the current power plant start operations at full capacity.
On other expenses that affected cash costs we have operating materials increasing by $28.5 million in the quarter. And very important we had a new agreement with unions in Peru and that represented an increase in labor cost of about $19 million for the quarter.
So I will say that we have higher labor costs that is impacting our cost position. Higher diesel and fuel in the quarter, and those two are the most significant with power.
For the rest of the year, for the remaining of 2013, what we’re expecting is a moderation of the total expenses as we have seen through the second quarter in terms of prices. And we are also expecting to have more production coming in.
We expect the recovery of Buenavista as we indicated before, and we're expecting new production or additional production from Cuajone coming from the high-pressure grinding rolls that will increase production that alone by about 6% in the Cuajone mine. So those two should be drivers of more production and also in the case of Toquepala, we will have a slight recovery in the ore grade, which has been the problem last year coming to a more normal ore grade for Toquepala.
Go ahead.
Carlos F. De Alba – Morgan Stanley & Co. LLC
Yes, sorry. So assuming that Buenavista situation with a floating Buenavista you saw at the end of July or early August, and with the impacts that you just mentioned on Cuajone and Toquepala, what is the cooper production outlook for the year?
I'm also assuming so you can just confirm that?
Raúl Jacob Ruisánchez
Yes, we indicated that we are forecasting 640,000 tons of total production for 2013 for copper. Of those, 20,000 tons will be from third-parties copper concentrate that we will process in our metallurgical facilities.
Carlos F. De Alba – Morgan Stanley & Co. LLC
All right. And you’re expect to sell all of this output.
Raúl Jacob Ruisánchez
Yes.
Carlos F. De Alba – Morgan Stanley & Co. LLC
All right. And any updates on the moly and silver production guidance for the year given that those are the two most relevant by-products?
Raúl Jacob Ruisánchez
yes. In the case of molybdenum, we are expecting to produce 18,800 tons, that will have the contribution of about 700 tons of the new molybdenum plant in Buenavista, that plant is already finished, and it’s being under testing in the second quarter.
And we expect to start commercial production in it through the third quarter of this year.
Carlos F. De Alba – Morgan Stanley & Co. LLC
And for zinc there alone, do you have any number?
Raúl Jacob Ruisánchez
For zinc basically we will maintain our current production ratio, we’re about we’re expecting to have about 100,000 tons of zinc produced from our mines for the year.
Carlos F. De Alba – Morgan Stanley & Co. LLC
For the year. Okay, and then the – I know I am taking a lot of your time, but just final question.
You mentioned earlier in the call that the Company will continue with a growth CapEx project even if copper went to $2 given the cash remuneration that you foresee even on social scenario. But what about dividends in that case, will the Company still be able to do the CapEx projects and continue to expect dividends or the dividend will be pretty much gone on the social scenario.
Raúl Jacob Ruisánchez
Let me ask Daniel Muñiz to comment on that.
Daniel Muñiz Quintanilla
Carlos, I mean yeah of course I mean we have taken a very stress scenario. We’ve analyzed all the projects and 50 projects required (inaudible) win copper price in order to make up 15%.
I mean the stress scenario and that Raúl have embarked this $2 stress scenario may not be (inaudible) dividends of course, but just for the sake of the argument, the industry has strong built, the cash flow generation position of the Company given under very dramatic copper prices.
Carlos F. De Alba – Morgan Stanley & Co. LLC
Fair enough. Thank you very much everyone.
Daniel Muñiz Quintanilla
Good, thanks.
Raúl Jacob Ruisánchez
Thank you very much Carlos. Yes, let me add to what Daniel said about the comment on the $2 copper price, we don't expect that to happen, but we have to prepare for the different pricing scenario, and as part of that we did a review of our possibility for moving forward with the projects at different price scenarios.
We also consider some other higher prices as well, but at this point it is important to report for us that we expect to move on with this project even if we have serious deterioration in the copper market, which is not our current household, but we have to know what we would do in that case.
Operator
And the next question comes from Marcelo Aguiar from Goldman Sachs. Please go ahead.
Marcelo Aguiar – Goldman Sachs
Hi guys thank you for the opportunity for the call. A bunch of my question was already asked, but couple of two additional Mr.
Raúl, can you talk a little bit about the discussion on the new tax in Mexico, where I mean, do you have any view in terms of the implementations, schedule, how it's going to be coagulated over EBIT or revenues. So that's going to the first question.
I'll make the second question afterwards.
Raúl Jacob Ruisánchez
On the Mexican royalty, it was approved by the House of Representatives in the past (inaudible) where currently the summer break of the Mexican Congress, and we are expecting this to be at the Senate in the fourth quarter of the year. But what was passed was the royalty based on EBITDA.
This is not a finished law that has to be applicable. So, at this point we’re waiting to see, what’s the end result of this discussion about new legislation in Mexico.
Daniel Muñiz Quintanilla
And let me just add there Raúl if I may. I mean, I guess though our company position is that there shouldn’t be any special tax on mining given though that Mexican exquisite regulation works, profit sharing works.
I mean, given the way all the tax invested in the mining companies were paid, I mean, I think it’s not fair to judge the mining industry elsewhere or worldwide in the same way. So, I mean, rounding off, but the Mexican Chamber of Mining has been doing strong, continuing lobbying with those of the (inaudible) in order to try and make a more stable and the investment spending reduced.
So that’s really the official position that we’ve been taking, and Raúl, just said is, I mean, there’s nothing official yet.
Marcelo Aguiar – Goldman Sachs
Okay. Fair enough.
Just one clarification here, Daniel, is if this is a proven at the Senate in a month, this comes into play the day after or just on January 1, 2014?
Daniel Muñiz Quintanilla
I mean, it could be anytime on that’s their parameter. I mean laws can be enacted and entering towards the date after.
We’re not into publication because of that or it could have a (inaudible) legislative power.
Marcelo Aguiar – Goldman Sachs
Okay. Fair enough.
Second question would be about your guidance for the long-term. Can you update us on your production guidance for copper for the next few years, and if you can also the CapEx.
I’m not sure if your data have changed before the last three months. And on the same tone, I do expect your cash cost for copper in 2014 to be lower and by how much compared to this year?
Raúl Jacob Ruisánchez
Okay. Let me talk first about the volume, the expected copper volumes for the next few years.
As we indicated for 2013, we’re expecting 640,000 tons. For 2014, we should have about 700,000 tons.
For 2015, 860,000 tons, for 2016, 1,100,000 tons and for 2017 1,175,000 tons of copper. Regarding CapEx, we already mentioned that we’re reducing our CapEx guidance from $1.8 billion to $1.6 billion in 2016.
For 2014, we’re expecting to spend $2.3 billion, for 2015, $1.4 billion; for 2016, $600 million; and for 2017, $250 million. This includes our capital project expansion trends as well as our maintenance capital expenses.
Marcelo Aguiar – Goldman Sachs
I’m sorry, Raúl. Is Tia Maria included in this and when do you expect Tia Maria to start up in this?
Raúl Jacob Ruisánchez
Yes. We’re including Tia Maria with an expectancy of beginning operations by the end of 2016.
Now, as you all know, Tia Maria is conditioned to receiving the approval of the national government as well as the local communities. So that project is conditioned to these two approvals to move on.
But we are considering using the legal limits that we have to submit certain information and to the government to answer us. We’re estimating the beginning of this project by the end of 2016.
So in our 2017 forecast we have Tia Maria production included. Regarding cash cost, we’re expecting for next year to have the benefit of the higher production.
As I mentioned, we’re expecting about 700,000 tons for 2014 of copper. So that should reduce the total cost of, the cash cost before any credit should be reduced considering this new production.
Regarding the byproducts, well, the question mark is what is going to be the price of the byproducts. We are considering increasing our volumes of molybdenum for about 20,000 tons for 2014.
In the case of zinc, we expect to recover our production at full speed in all the operations of (inaudible). That includes the San Martin mine as well.
That should increase our production by about 115,000 tons of zinc. Silver should have little bit more production in 2014 and coal will be pretty much as it is right now.
Marcelo Aguiar – Goldman Sachs
Thank you very much, gentlemen.
Raúl Jacob Ruisánchez
So, generally speaking we're expecting to have more copper production in 2014 as well as more byproducts production. However, it depends on the prices of the products and the cost that we will face in the next year to happen a deal for where the cash cost is going to be.
Operator
Our next question comes from Marcos Assumpção from Itaú BBA. Please go ahead.
Marcos Assumpção – Itaú BBA
Hi, good afternoon, everybody. First question is related to Buenavista expansion.
If you could comment how long it will take after the start up to ramp up the capacity of Buenavista – on behalf of this brownfield project? And also the potential impact on Southern Copper's cash cost after the implementation of the project?
And also, if you could comment on the markets and dimensions as well you mentioned earlier in the call you're not hedging. You believe in the market and the copper price, we believe the market is relatively high.
If you could comment a little bit on the second half of the year, what's your view right now for prices and also for 2014 as well if you can? Thank you.
Raúl Jacob Ruisánchez
Okay. Let me start by the Buenavista question.
We have here two projects, the SXEW III trend that we will be operating next year in Buenavista and a new concentrator. In the case of SXEW III plant, we have the ramping up of these kind of facilities is relatively fixed.
By that I mean that once you finish the plans and you have it at the commissioning during that period you usually increase the production very quickly in the quarter. Okay, so if we finish the plant and see in the second by the end of the third quarter this one should be up and running at full capacity.
That is what we are expecting. In the case of the concentrator, the new concentrator, it may take a little bit longer than that about six months to reach full capacity and we will enjoy benefit of its production through the second half of 2015.
And most likely in the fourth quarter, we will expect it to have at full speed as well. That includes the molybdenum circuit that we’re – the second molybdenum circuit that we are building with these facility.
Regarding the copper market, we are seeing for the rest of the year, we have more production coming from expansions as well as greenfield projects. And some demand that is lagging from what was expected at the beginning of the year.
We think that the news that we’re hearing, the macroeconomic levels are affecting the demand for copper. So we see some very encouraging signs particularly in China regarding housing construction as well as the (inaudible) industry.
That is still – it’s not transforming into higher imports, but we do know that China is short of copper and that should eventually reflecting the market. Besides that, we are starting to receive still very low news from Europe and the fact that it is not decreasing any longer.
That is on the positive side, given the size of the European economic prices and the U.S. is recovering at a slow rate though, but it’s moving in the right direction.
On the supply side, usually we have each year significant effects on supply regarding the four graded case, labor problems and some other concerns. That is also affecting supply.
This has been a trend that has repeated through different years and we don’t think that this year should be different than that. For 2014, I thing it’s even though balanced, reduced supply and demand material that it will be some more strengthened than demand.
That year, I think, it’s premature. We need to see how the world economy it’s behaving by the end of the year and that will certainly change the minus fly balance.
In the year we have had significant variance in the market view through the year. So that volatility that we’re facing at the macro level is affecting the corporate market and that is quite clear sign that we’ve seen now a days.
Marcos Assumpção – Itaú BBA
Okay and do you have a sense of how inventories are in China right now?
Raúl Jacob Ruisánchez
We understand that they were depending on the source about 800 tons to 1 million tons in non-bonded warehouses at the beginning of the year, and that number has decreased to half of it, depending again on those of you ask about this.
Marcos Assumpção – Itaú BBA
Okay last question, when you mentioned about the stress scenario for copper prices in your budget, for that CapEx, that you’re making right now, what will be the kind of returns that you get using that stress scenario price?
Raúl Jacob Ruisánchez
Well, we did our project evaluation using $2 in most of the projects that we are undertaking now. We think that the return is very positive we don’t disclose that information, sorry about that Marcos, but that’s the view of the Company and that’s why we are committed to move on with these projects.
Marcos Assumpção – Itaú BBA
All right, thank you very much.
Operator
Our next question comes from Autumn Graham from Barclays. please go ahead.
Autumn Graham – Barclays Capital, Inc.
All of my questions have actually been asked thanks.
Operator
Our next question comes from (inaudible), please go ahead.
Unidentified Analyst
Yeah hello, thanks for very interesting presentation. I wanted to ask about smelter capacity on the Caridad, I understand there is some refurbishment work going on there at the moment.
I was wondering any increase in capacity was expected from that work, and then looking into the future?
Raúl Jacob Ruisánchez
No, we don’t have any specific plans to expand the capacity in Caridad. Not yet.
Unidentified Analyst
Okay. I was going to say, looking into the future with capacity of Buenavista including, whether you had any plans including smelter capacity in that area?
Raúl Jacob Ruisánchez
Well, the company, it’s looking to build a new smelter in a different site mainly in (inaudible) in Mexico. That is a project that we have been developing in the last few quarters, but there is nothing to report at this point on this matter.
Unidentified Analyst
Okay. Thank you.
Raúl Jacob Ruisánchez
You’re welcome.
Operator
Our next question comes from Alfonso Salazar from Scotiabank. Please go ahead.
Alfonso Salazar – Scotiabank
Thank you. I just want to share with you, what’s the EBITDA production value that you’d expect us for Cuajone, after all the projects are finished.
It seems to me that it should be increasing to 180,000 tons but in the press release it says that, production is, it’s not a 211. So I was wondering if you can clarify it.
Raúl Jacob Ruisánchez
All right, thank you for your question. Hold on a second please.
I know we’re expecting, you’re in the number, we’re expecting to produce about 180,000 tons in Cuajone. Once these projects are finished, I’m considering that we already are investing in new equipment to maintain our ore grade as well as the slowest stability in the right standard of the Company.
Alfonso Salazar – Scotiabank
Thank you.
Raúl Jacob Ruisánchez
You’re welcome.
Operator
Our next question comes from (inaudible) from FBR Capital Markets. Please go ahead.
Unidentified Analyst
Good afternoon guys and thank you for all the color on the production and CapEx guidance. Just a follow-up question on the project evaluation analysis, when you think about going ahead with these projects even if its $2 copper price, does that take into account, drawing down on the cash balance and probably borrowing some issuing additional debt to fund those projects or is it just purely from operating cash flow and just cash balance?
Raúl Jacob Ruisánchez
Well, we did an bond issue in November of last year. Our cash needs were currently have very safe cash position that will protect us in case of a market (inaudible).
And on that base, we won’t consider at this point that we will requiring additional cash at this point. Daniel you may want to comment on that as well.
Daniel Muñiz Quintanilla
Thank you, and the exit price are lower ones very 2 to you guys, I mean what happens if copper price dropped dramatically, hence how strong was the position of the company yesterday even on the reduction circumstances. Yeah, we get issue on the number (inaudible) and in order to guarantee (inaudible) projects capital structures have to be analyzed and rolled into normal basis independent of market condition.
So keep on our capital structure, but the $2 mentioned by Raúl was mostly without additional debt and without paying dividends, just to give you an idea of how strong our financial position is today. Thank you.
Unidentified Analyst
Well, and does that assume any meaningful improvement from the cost side, because I know when we are talking about a $2 copper price, product crude oil is not going to be $105 or $110 or something like that. Does that take into account the benefits on the cost side as well?
Raúl Jacob Ruisánchez
Not. We haven’t made any specific assumption, let’s say, on fuel prices or some other key material prices.
So that will be in our favor in the sense that we do know that if we face a very low price copper scenario that should also pull down some of the prices, but we are not considering that in our outlook.
Unidentified Analyst
Okay, great. Thank you very much, guys.
Good luck.
Raúl Jacob Ruisánchez
Thank you.
Operator
Our next question comes from Mandeep Singh from JPMorgan. Please go ahead.
Mandeep Singh Manihani – JPMorgan Securities LLC
Hi, thank you. Hi, Raúl.
My question is related to the Quebalix IV project, which was added to the final list of topics. Could you please provide some more details about the project, its timeline and the benefits that we expect to see after this investment is completed?
And the second question is related to the expected timeframe to complete the construction at Toquepala after the approval of [this] and when do you expect the production to begin there? Thank you.
Raúl Jacob Ruisánchez
You’re welcome. Thank you very much for your questions, Mandeep.
In the case of Quebalix, generally speaking the Quebalix facilities have two significant benefits for the company. The first one is that, by reducing the size of the material the mineral that will [leached] we’ll get more copper out of them.
That’s the first benefit. And the second one is that we have a quicker recovery of the material of the copper contained in the mineral.
Generally speaking, in the case of these portable leads, it will accommodate our production as a three SXEW plants that we will have in Buenavista. Two of them are already operating and have the Quebalix III to supply material for them.
The third one, it’s requiring this kind of facility to maintain the production levels that we’re expecting from it. So, roughly speaking, we are expecting to have a more stable production coming from the SXEW portion of the Buenavista facilities.
Could you remind me your second question please?
Mandeep Singh Manihani – JPMorgan Securities LLC
Yes. You mentioned the Toquepala.
Raúl Jacob Ruisánchez
The Toquepala expansion is expected for the first quarter of 2016 to start production. Condition, as I said in this case, to approval this year of the environmental impact study, and the concurrence of the local communities.
We’re expecting those two approvals in order to move on with the projects. We are not doing anything until the project has these appropriate approvals.
Mandeep Singh Manihani – JPMorgan Securities LLC
Thanks, Raúl.
Raúl Jacob Ruisánchez
You’re welcome.
Operator
Our next question comes from Pedro Fuenzalida from Larrain Vial SA Corredora de Bolsa. Please go ahead.
Pedro Fuenzalida – Larrain Vial SA Corredora de Bolsa
Yes, good morning. Hi, Raúl and everyone.
Yes, two questions. The first one is, what is behind the reasoning in the capital items from 1.8 to 1.6, is this highly leases in projects or just lower CapEx.
And second one is on the physical premiums that we are seeing and that being jumping especially from the second quarter and how well-positioned are you in Southern Copper to take advantage of these or if you are massively committed in long-term contracts? Thank you.
Raúl Jacob Ruisánchez
Thank you very much for your question. Regarding the CapEx, now we are maintaining our capital budget as indicated.
It's worth about $6 billion for this year. Now it's $6.3 billion and the addition is a new project, the Quebalix III that I addressed in the prior question.
Pedro Fuenzalida – Larrain Vial SA Corredora de Bolsa
Sorry. Well, just particularly on the 2013 from 1.8 to 1.6?
Raúl Jacob Ruisánchez
Just postponing the certain expenses and payments, when you do the budget you have an idea of how much, what kind of amount of money you need, but once you are through the year you will start negotiating with your vendors of equipment and constructors of the facilities and then you establish a committed path for CapEx. So in some cases it's a little bit of a postponement in expenses that has been already committed.
In some other cases, it's just a delay in the time that you will receive for an equipment. So that's why we’re even though we spent about $700 million in CapEx in the first half of the year, we're expecting to spend more than that, about $900 million in the second half of this 2013.
Pedro Fuenzalida – Larrain Vial SA Corredora de Bolsa
Okay, thank you. On the physical side please?
Raúl Jacob Ruisánchez
Yes, on the premiums that you mentioned, well we generally speaking, we have the firm contracts that are for the year and has specific commercial conditions related with them. So even we are seeing their opinions on particularly on refined copper, but those who will be achieved through our spot sales that are reduced portion of our total sales.
Pedro Fuenzalida – Larrain Vial SA Corredora de Bolsa
In general, how much do you leave for this book market?
Raúl Jacob Ruisánchez
I am sorry.
Pedro Fuenzalida – Larrain Vial SA Corredora de Bolsa
Which portion is left for this book market?
Raúl Jacob Ruisánchez
It varies from year to year and we don’t disclose this information.
Pedro Fuenzalida – Larrain Vial SA Corredora de Bolsa
Okay, thank you.
Operator
We have no more questions in the queue at this time.
Raúl Jacob Ruisánchez
Well, if we don’t have any more questions, I would like to well conclude our conference call for the second quarter results. We certainly appreciate your participation and expect to have you back with us when we report the third quarter results in October.
Thank you very much and have a nice day.
Operator
Thank you ladies and gentlemen, this concludes today’s conference. Thank you for participating, you may now disconnect.
Raúl Jacob Ruisánchez
Thank you very much Trisia.
Daniel Muñiz Quintanilla
Thank you very much Trisia.