Oct 24, 2017
Operator
Good morning, and welcome to Southern Copper Corporation's Third Quarter 2017 Results Conference Call. With us this morning, we have Southern Copper Corporation, Mr.
Raul Jacob, Vice President of Finance, Treasurer and CFO, who'll discuss the results of the company for the third quarter 2017 as well as answer any questions that you might have.
Operator
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, and the company cautions do not place undue reliance on these forward-looking statements.
Operator
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.
Operator
Now I will pass the call onto Mr. Raul Jacob.
You may begin.
Raul Jacob
Thank you very much, Richard. Good morning to everyone, and welcome to Southern Copper's Third Quarter 2017 Earnings Conference Call.
Raul Jacob
Participating with me in today's conference are Mr. Oscar González Rocha, Southern Copper's CEO and Board member; and Mr.
Daniel Muñiz, Executive Vice President and also Board member of the company. In today's call, we will begin with an update on our view of the copper market.
We will then review Southern Copper's key results related to production, sale, operating costs, financial results and expansion projects. After that, we will open the session for questions.
Raul Jacob
Now let's focus on the copper market, the core of our business. During the last quarter, the London Metal Exchange and the COMEX market's copper prices increased significantly.
From an average of $2.57 per pound in the second quarter of 2017 to $2.88 per pound in the last quarter, and up to $3.20 per pound as of October 16. This last price has been the highest since August of 2014.
We believe this price improvement is a result of the synchronized economic growth recovery, particularly in the capital goods industries. The latest Chinese data indicates a strong growth in this country.
According to China's Central Bank governor, this country is heading towards a 7% GDP growth for the second half of the year. This compares to a prior market expectation of 6.7%.
As China is the world's largest copper consumer, with over 45% of the total demand, a higher Chinese GDP growth expectation is good news for our industry.
Raul Jacob
Regarding supply. We expect a weak response as a result of the consistent decline in investments that several companies have had in recent years.
In addition to this labor unrest, excess government taxation and technical difficulties are affecting production. As a result of these factors, we expect a copper market deficit in 2018, given the strong support for prices.
Raul Jacob
Let's now focus on Southern Copper's production for the past quarter. Copper mine production decreased by 1.5% in the third quarter of this year, down -- or to 221,579 tons from 224,910 tons in the third quarter of 2016.
This was mainly the result of a decrease in our production at our Buenavista and Cuajone mines, due to lower ore grades and recoveries that were partially offset by much higher Toquepala production. For 2017, we are slightly adjusting our production forecast level to 890,000 tons -- excuse me, from 890,000 tons to 885,000 tons for this year.
For 2018, we will initiate production at the new Toquepala concentrator and expect to produce 980,000 tons of copper, continuing with our aggressive organic growth program.
Raul Jacob
Silver represented 4.2% of our sales value in the third quarter of 2017 with an average price of $16.80 per ounce in the quarter, a 14.2% decrease from the third quarter of last year. Mined silver production increased by 4.2% in the third quarter of 2017, mainly as a result of higher production at our open pit operations in Mexico and Peru.
This was partially offset by lower production of our IMMSA operations. For 2017, we expect to produce 16.1 million ounces of silver, in line with last year's production of 16.2 million ounces.
Raul Jacob
Zinc represented 3.6% of our sales value in the third quarter, with an average price of $1.34 per pound in the quarter, an improvement of 31.4% from the same quarter of last year. Zinc mine production decreased by 2.5% to 18,377 tons in the third quarter compared with same period of last year, and this was due to lower mineral process and lower grades at our Santa Eulalia and Santa Barbara operating mines.
Zinc prices have increased by 43.2% when compared the first 9 months of this year with the same period of 2016. This significant price increments are reflecting the good long-term fundamentals of this metal due to its significant industrial consumption and mine production shutdowns.
It is important to note that in the first 9 months of 2017, zinc inventory have consistently decreased in the case of the London Metal Exchange by 40% and for the Shanghai Exchange minus 58% or a 58% reduction in inventories. This is improving these market fundamentals.
Raul Jacob
For molybdenum, it represented a 5.4% of the company sales value in the third quarter of 2017. Molybdenum prices averaged $8.05 per pound in the quarter, which compares to $6.94 or 16% higher prices a year ago.
Molybdenum production decreased by 3.4% to 5,389 tons in the third quarter of this year from 5,581 tons in the third quarter of 2016. This was principally due to lower production at the Toquepala operations and La Caridad.
And these lower productions was partially offset by the recovery of the Buenavista molybdenum production with double its volume to 1,003 tons or 100% increase.
Raul Jacob
For 2017, we expect to produce 21,200 tons of molybdenum.
Raul Jacob
Regarding our financial results, for the third quarter of 2017, sales were $1.7 billion. This is $276 million higher than sales of the third quarter of 2016 or 19.7%.
Copper sales volume decreased by 3.4% but value increased by 29.2%. This is because of a 32.7 higher average copper prices, mainly from the LME.
Raul Jacob
Our total operating cost and expenses decreased by $54.4 million or 5.2% when compared to the third quarter of 2016. The main cost reduction has been in energy, sales expenses, inventory consumption and higher capitalized reachable material.
These factors were -- or these cost reductions were partially offset by higher fuel cost, labor cost and worker's participation. The third quarter 2017 adjusted EBITDA was $863.1 million, which is 57.9% higher than the $546.5 million of adjusted EBITDA that we had in the third quarter of last year.
The adjusted EBITDA margin for the third quarter was 51.5%, and this compares with 39% in the same quarter of 2016.
Raul Jacob
The operating cash cost per pound of copper before by-product credits was $1.45 per pound in the third quarter of this year. This is $0.087 lower than the value for the second quarter of 2017.
This 5.7% decrease in operating cash cost is a result of lower costs per pound from production cost; lower treatment and refining charges, and higher sales premiums, partially offset by higher administrative costs. Southern Copper's operating cash cost, including the benefits of by-product credits was $0.902 per pound in the second -- in the third quarter of 2017.
This cash cost was $0.08 lower than the cash cost of $0.982 that we had in the second quarter of this year.
Raul Jacob
Regarding by-products. We had a total credit of $257 million or $0.543 per pound in the third quarter of 2017.
This figure is going to represent 1.3% decrease when compared with the credit that we had in the second quarter. In the second quarter, we had a credit of $254 million or $0.55 per pound.
Raul Jacob
Our net income was $401.8 million. This is 103.3% higher than the third quarter of 2016 net income of $197.6 million.
So we more than doubled our net income between the third quarter of this year and the third quarter of 2016. The increase was mainly the result of higher net sales and our proven and consistent cost control policies.
The net income margin for the third quarter was 24% compared with 14.1% for the third quarter of 2016. Diluted earnings per share were $0.52.
This is 2x the earnings per share of the third quarter of last year.
Raul Jacob
Regarding capital expenditures and looking at our Mexican projects, we have the Buenavista Quebalix IV project, which is consisting of a crushing, conveying and spreading system for reachable ore. This is called the Quebalix IV, which has been completed on time and under budget and is currently operating steadily.
This project will reduce mining costs as well as increasing SX-EW corporate recovery, allowing the Buenavista unit to reach its copper production capacity of 500,000 tons.
Raul Jacob
The Buenavista zinc concentrator is a project located within the Buenavista facility and contemplates developing of a new concentrator to produce approximately 80,000 tons of zinc and 20,000 tons of copper per year. This will allow us to double our current zinc production capacity.
As of today, we have concluded the basic engineering and are working on detailed engineering of the project. We estimate an investment of $413 million for this project and expect to initiate operations by the first half of 2020.
Raul Jacob
The Pilares project in Sonora as well is a project located 6 kilometers away from La Caridad, our Caridad operation, and will be developed as an open pit mine operation. The ore will be transported by truck from the pit to the primary crushers of the La Caridad copper concentrator, helping to significantly improve the overall mineral ore grade in Pilares, the ore grade is expected to be 0.78% versus 0.34% in the La Caridad deposit.
Raul Jacob
During the third quarter, we continue to advance on the required preconstruction activities, including the final outline designs for the road through which the ore will be transported to the La Caridad mill. An investment of $159 million is currently estimated to produce 34,500 tons of copper per year.
The project start is expected for the second quarter of 2019.
Raul Jacob
Focusing on our production -- Peruvian projects. We currently have 5 major projects in Peru with a total capital budget for this projects of $2.9 billion of which $1.4 billion has been already invested.
Raul Jacob
The Toquepala expansion project is a $1.2 billion project includes -- that includes a new state-of-the-art concentrator, which will increase Toquepala's annual copper production by 100,000 tons to 217,000 tons in 2018 and 260,000 tons in 2019. Through September 30 of this year, we have invested $743.5 million in this expansion.
The project has reached 80% progress and is expected to be completed by the second quarter of next year.
Raul Jacob
The Toquepala high-pressure grinding rolls or HPGR system has the main objective to ensure that our existing concentrator will operate at its maximum annual production capacity of 117,000 tons of copper while reducing operating costs through ore crushing efficiencies, even with an increase of the ore material hardness index. The budget for this project is $50 million of which we have invested $32.2 million as of September of this year.
We expect the Toquepala HPGR investment to be completed in the first quarter of next year.
Raul Jacob
The Cuajone Heavy Mineral Management Optimizing Project in Moquegua, it's a project that has been finished. It's completed.
And it consisted of installing a primary crusher at the Toquepala mine pit with a 7-kilometer overland conveyor belt system for moving ore through the concentrator. The project is optimizing the hauling process by replacing rail haulage, thereby reducing operating and maintenance costs as well as the environmental impact of the Cuajone mine.
The crusher has a processing capacity of 43.8 million tons per year. As of September of this year, the project is completed and initiating operations as I mentioned.
And we have invested $195 million out of the approved capital budget of $215.5 million.
Raul Jacob
The Cuajone tailing thickeners project at the concentrator will replace 2 of the 3 existing thickeners with a new hi-rate thickener. The purpose is to streamline the concentrator flotation process at Cuajone and improve water recovery efficiency by increasing the tailings solids content from 54% to 69 -- 61%, we will increase recovered water production, reducing -- and reduce freshwater consumption.
Equipment assembly is completed and we are in the commissioning process. As of September, we have invested $24.4 million in this project out of the approved capital budget of $30 million, and we expect it to be completed by the end of this quarter.
Raul Jacob
Tia Maria. Well, for Tia Maria, we have completed engineering and after having complying with all environmental requirements, we have obtained the approval of the environmental impact assessment.
We're working jointly with the Peruvian authorities to obtain the construction license of this 120,000 tons SX-EW copper per year Greenfield project with a total capital budget of $1.4 billion.
Raul Jacob
Regarding this, and as you know, it is company policy to review at each board meeting cash resources, expected cash flow generation from operations, capital investment plan and other financial needs in order to determine the appropriate quarter-end dividend. Accordingly, as announced to the market on October 19, the Board of Directors authorized a cash dividend of $0.25 per share of common stock payable on November 22.
These 4 shareholders of record at the close of business on November 8, 2017. Well with this in mind, ladies and gentlemen, thank you very much for joining us, and we will like now to open up the forum for questions.
Operator
[Operator Instructions] And our first question on line comes from Thiago Lofiego from Bradesco BBI.
Thiago Lofiego
I have 2 questions. Just regarding Buenavista's lower production because of lower ore content.
When should we expect this to be normalized and if you could update us on production forecasting for 2018 that would be appreciated. And second question regarding Tia Maria.
You mentioned -- you guys are mentioning that expecting the permits for the first quarter of next year. How realistic do you think that is and if on the parallel basis, you are maybe accelerating the thought process or the real process regarding a lot of co-development and eventually you could drop Tia Maria and just go forward El Arco or any other projects that you have in your pipeline?
Raul Jacob
Okay. Thank you very much for your questions, Thiago.
Regarding the Buenavista operation. Basically, what we're seeing is a difficulty on the PLF, which is a pregnant liquid solution coming from the 4 oxides -- from the oxides that are used for the SX-EW plant production.
We have been taking several measures to solve this problem. One important point here is the Quebalix IV because this facility is specifically designed to increase copper recovery and accelerate copper production from the areas where we obtain the copper oxides and send this to the SX-EW plant.
So we're expecting our production for next year in Buenavista to improve and basically to recuperate the gap that we're seeing this year, vis-à-vis, last year. Focusing on Tia Maria.
Well, we are very optimistic on the advancement that the project has had. We believe that we're doing a good job with the local communities.
And this is basically why we express a positive view on the project. We are working with the Peruvian authorities, as I've said, and we're expecting the project to move on in 2018.
And we indicated as a goal the first quarter. That's a goal at this point.
For El Arco, we're working to develop this deposit. It's one of the options that we have.
You have to keep in mind that we have some other projects that are in our pipeline such as El Pilar or Los Chancas for instance.
Operator
[Operator Instructions] Our next question on line comes from Lucas Pipes from FBR.
Lucas Pipes
I wanted to follow-up a little bit on Tia Maria. It sounds like things are moving in the right direction.
And at this point, where do you see kind of the major roadblocks. What's -- what would you say is happening at the community level?
And what sort of engagement are you pursuing to bring this project to a point where you have all the necessary permits?
Raul Jacob
Well, we -- As I say we're optimistic. I rather not get into the details on this.
But the company wants to transmit that we're doing progress and we're positive about the project. Excuse me for not giving more details as part of our -- the way that we're developing this strategy that we're currently moving into the area.
Lucas Pipes
Okay. All right.
I'll leave it there on Tia Maria. And then maybe we can switch to the macro side.
So investors are starting to feel a lot more positive about copper looking out with deflations plus growth. Maybe a lot of growth coming from the electric vehicle sector and I wondered kind of where do you see yourself positioned in terms of adding additional projects beyond what you've outlined in the release in this morning?
And where do you see, ultimately, the copper market trending over the next couple of years? I would appreciate your perspective.
Raul Jacob
Well, as a mentioned at beginning of the call, we're seeing this market coming into a deficit. We believe that this deficit will be evident next year.
New projects has not been approved in the last 5 years we had 5 years in which each year, prices were lower than the prior ones. So this is the year where we have changed this trend.
It's an inflection point for the market, and we believe that a market in deficit will provide a good base for copper prices to hold or to even improve. Now we don't do a forecast on copper prices.
But our view on the market is very positive. And as you well mentioned, there are some upside possibilities on the fact that we have much higher demand coming from electric vehicles in the future.
And on top of that, you have to keep in mind that the current operations are losing each year ore grades or having the more difficulties to extract the copper from the mines and to process them. So that will increase the average cost over time.
Operator
Our next question on line comes from Andreas Bokkenheuser from UBS.
Andreas Bokkenheuser
Just 2 quick questions from me. The first one is we noticed, obviously, third-party concentrate sales came up quite a bit at 34% for the quarter, about 40% for the first 9 months of the year.
Can you just remind us one of these concentrate sales represent? What was the direct reason for the increase in sales?
So that would be to first question. The second question, again, on the project pipeline.
You mentioned, obviously, the copper price outlook is looking a lot better. So you're relooking at potential projects that you're going to execute on.
What do you think are going to be the main challenges of getting these projects off the ground? Is it mostly economics?
Or do you think it's more relating to regulatory risks such as getting the licenses and so on and so forth.
Raul Jacob
Okay. Thank you very much, Andreas.
Let me focus first on the third parties. This is -- what we do is we that we acquire copper from third parties, basically to fill up our smelting and refining facilities.
What you're seeing here, our financials is that we have been acquiring, as you mentioned, Andrea's, much more copper concentrate from third parties. And the reason for that is that our own operating units are processing more than what we have in the past.
On top of that, we have some good news regarding our operations, which is that currently, we're alone in copper concentrate in Mexico. And next year, after we start the new concentrator for Toquepala, we will be also alone in terms of this material for Peru.
In terms of the economics of third parties, they are not as good as the economics that we have for processing our own materials. So in this regard, where we have a positive view on what is going to be the impact of the new production that we are going to have in Peru for next year.
Now going into the challenges that we have for new projects. I think that the economics are at this point, a key matter, particularly for the Mexican projects.
We have to be sure of what we want to do and how we want to do these projects. In the case of the Peruvian projects, besides the economics or technical challenges that these projects have, we always have to concern about the permitting -- the obtaining of permits.
It's more difficult because of social concerns in Peru. Having said that, our view it's very positive on the work that we're doing currently with the local communities and the authorities in Peru as well.
Operator
[Operator Instructions] Our next question on line comes from Renan Criscio from Credit Suisse.
Renan Criscio
Two questions on my side, the first one is that you posted a really notable performance on the cost side this quarter. Even not -- before the credits from the by-products.
So my first question is, how sustainable you think these costs are? Or do you think there is further room for cutting costs?
So if you can provide a guidance for cash cost in the following year, that'll be helpful. The second question is on the Moquegua project.
If you can just remind us what are the dates for the auction to take place? And whether or not you intend to participate in it?
And also if you can comment on the economics of the asset or any information you can share with us that would be very helpful.
Raul Jacob
Okay. On the cash cost, our view on the cash cost of the company for the next few years is very positive.
We think that the new copper units we will be producing next year coming from the new concentrator at Toquepala will help us to decrease further our cash costs. And I believe that, that plus the better price environment that we're seeing for our by-products will certainly transform into a lower cash cost for next year and lower value for the company in that regard on cash cost.
Focusing on your Moquegua question. Well we see this is a very interesting asset.
Oscar González Rocha
I was going to add that basically what we did which was a major cost restructuring for Peru was have a new electricity contract with new companies as the old contracts of the previous provider, their plants were very old, they were expensive. And that we are just beginning to see all this cost decreases.
So I mean since April, we're looking at that. So we should expect this cash cost to be as low as it is today.
And as Raul pointed out, with the new Toquepala concentrator, it's going to be ridiculous. And Raul, you're commenting on Moquegua because I'm already on the mic.
I'll say that -- I mean, we are looking at it. I mean, as you know, it's like around the 22 life of mine project with around 117,000 tons of copper that the government of Peru is marketing after Anglo decided not to pursue the project.
And I mean our business development is looking at it, we think the dates that you asked about are a little bit aggressive. We're all bidders out there.
And I mean, it's in the northern part of Peru. We already have a goldmine, or participating goldmine that is called Santo [indiscernible] there.
And were looking at it and will let you know if we are putting an offer. But yes, we're looking at it and working on it.
Operator
Our next question on line is from Mark Assumpção from Itaú.
Marcos Assumpção
So my first question on the copper scrap market? If you could comment a bit on that given the recent increase in prices, how is the copper market, scrap market evolving.
And the second question is if you are reconsidering already a buyback program, a more aggressive one now that the company is starting to generate much more cash and that CapEx is going to be probably more limited going forward?
Raul Jacob
Regarding the scrap market, basically, as you mentioned, given these new prices in that environment, we think that we may see more scrap coming to the market. Now at the same time, due to environmental reasons, several governments and this include the Chinese government as well, our thinking actually is not to go in this time when to start dig into their country.
So we're seeing that on one hand, we will have somewhere -- in the market will have some more scrap available. But on the other hand, it will be forbidden by several governments to be used in their smelters or refineries due to the environmental effect.
Oscar González Rocha
Regarding the buyback, if I may jump in. As you've seen, we haven't been buying back here at Southern copper for the last -- for the whole year essentially.
I mean, we've this quarter, the board decided to increase the dividend from 28 -- from $0.14 last quarter to $0.25 this quarter. So that's how we've been kind of giving back value to our shareholders.
As you know, we have still, I mean, to conclude Toquepala. That's the priority.
And then the Tia Maria is a goal as Raul pointed out at the beginning of next year. So, I mean, for us it's to be very prudent with the cash position and to ensure that all these projects are fully computed on time and budget and come into our pipeline of production.
Marcos Assumpção
Okay. Just a follow up on that.
What is your preference between buyback and dividends? And what are the drivers that you are looking at when you consider doing one or the other?
Daniel Quintanilla
Just as Raul pointed out during the script on the beginning of the call. I mean, the board analyzes as this every quarter.
I think, we believe that Southern Copper has and has had a track record regarding dividends. We are more believers in track record than in policies with regards to dividends.
And in the past, we bought back shares. I mean, basically we thought it was very undervalued, not that we believe that the market is paying full value for all the growth that Raul pointed out.
You would see Tia Maria, Charcas, El Arco, there's a lot of value here that's not been, we believe, properly recognized by the market that we want to maintain a dividend track record. And whenever we see this price increase in cash building up that we don't need, we're going to keep increasing I think.
I mean, I'm one of the board members but not that's issues the board every quarter but yes, I think you should expect to see dividends keep increasing. I don't think that's a lot of buyback now.
Operator
Our next question on line comes from Novid Rassouli from Cowen & Company.
Novid Rassouli
Just going back to the potential, the Chinese scrap import ban on scrap copper. Are you guys already seeing that affecting domestic buying behavior in China?
Is it already impacting the market?
Raul Jacob
No, not really, but we're expecting that to happen.
Novid Rassouli
Okay. And I mean, do think the potential ban there -- first off, what do you think the likelihood is?
I know we've heard about it being effective in 2018. I just wanted to get a sense.
It still seems like it's a little bit cloudy from our end. Maybe you guys have some more details.
But what's the likelihood of that going through and do you think any of the recent rally in copper prices has been aided by the fear of not having access to scrap, and therefore, purchasing more concentrated and refined and ahead of that coming to fruition in 2018?
Raul Jacob
No. I think that the latest rally is not -- we're not seeing, at this point, the physical markets with lacks of supply.
But I believe my personal view is that the market is anticipating the future deficit that the copper market will have. On the concentrate market, we're seeing some -- in the next few years, some scarcity of concentrates that is creating some concerns on some of the consumers.
And in the case of the scrap market, we're at a very premature moment now to have a wide view on what is happening with scrap. But what we see quite clearly is that the concentrate market will be tight in the next few years.
Not much concentrate around. And obviously, as demand goes, growing at say 2% per year worldwide is supply is not performing as well.
Well, you do have first to consume your inventories and then asking for getting materials from other sources. So for now, what we see is that the market is into -- is coming into a deficit and no projects are around to fully supply the market in the next few years, other than ours obviously, and some others that are known.
Novid Rassouli
Got it. That's helpful.
If in '18, category 7 imports from China are banned, do you think the access scrap in the global market offsets the increased demand for constant refinery in China? Or do you think the net effect of that is additional upside pressure to copper prices?
I know it's a little bit premature, but I just want to see if you guys have views there?
Raul Jacob
We usually see scrap showing up and putting pressure when copper prices are going that up over a certain level. At $3.15, $3.20, we'll see some more scrap in the market, but that doesn't mean that we're seeing as much scrap, let's say, what we have in the past when copper prices were over $4 or above $4 per pound.
So we are not seeing this as an element that is putting pressure on prices on a significant base.
Operator
Our next question on line comes from Guillermo Estrada from GBM.
Guillermo Estrada Madrazo
I just wanted to ask if you can provide an update on the copper production profile as well as the CapEx evolution going forward. My second question is regarding copper prices.
You have been tailing and we have seen that copper price reach a 3 year ago high level. But are you considering to hedge copper price going forward?
I mean, this can be a strategic thing for the company if copper prices began to decrease, right?
Raul Jacob
Okay. Daniel, would you like to comment on the hedge please?
Daniel Quintanilla
Sure. I mean, as you know, we've hedged in the past.
We do not have a policy of not hedging as other -- some, basically what U.S. companies have.
I mean, we still believe, as Raul pointed out in the beginning of the call, that there will be a structural deficit. I mean, there were no major projects, or are no major projects, major I mean more than 100,000 tons of copper per year coming into the market fairly soon that we are aware of.
And I mean, we are positive on the structural deficit going forward. We are not looking at hedging at this moment.
And with the cost structure that you are looking at here and as we've pointed out, decreasing will be a new electricity contract in Peru, I think it's for the company prudence not to hedge at the moment. And when I get that said, I know you want to add something, though.
Guillermo Estrada Madrazo
No, not really. On the production -- copper production forecast.
As I said, for this year, we're expecting 885,000 tons; for next year, 972,000 tons. For 2019, 1,032,000 tons; 2020, 1,100,000 tons; 2021, 1,183,000 tons.
That's how we recurrent production forecast. On CapEx, we have an expectation for 2017 of $1.2 billion of expenses; for 2018, $1.5 billion; 2019, $1.8 billion; 2020, $1.3 billion; and 2021, $1.1 billion.
This is including projects as well as maintenance CapEx, which we're estimating very close to $400 million per year.
Daniel Quintanilla
I think that it's all for Tia Maria, the numbers that Raul just pointed out includes all of Tia Maria's CapEx and a little bit of El Arco.
Raul Jacob
And let me say that also the production does include Tia Maria. El Arco is not part of the production but Tia Maria is.
Guillermo Estrada Madrazo
Okay. And just a follow-up on the hedge of copper prices like what will be the main points in the copper market that will move the needle in terms of: One, you took a decision like to hedge going forward?
I mean, what will be the most important things that you will see in the market so you can take the decision?
Daniel Quintanilla
Sure. I mean, we've -- such that it have been 3, 4 years as we have not hedged at all.
I mean, as was if trough that we'll see in the cycle, we didn't hedge. The last time we hedged was at the all-time high in copper.
I don't have it from the top of my head it's like in 2010 and '11, so to speak when we left hedge. I mean, we're not looking at hedging now.
I mean, I think we are looking at cutting costs again. We're looking at completing the project, the increase production from Toquepala would be immediate for next year.
Honestly, we're not looking at hedging. So I don't know what you're seeing in other companies and what are your views there that we are positive on the market.
And we are just happy to have one, if not the best cost structure in the industry. And -- so hopefully, we keep on seeing prices even above here.
Operator
Our next question on line comes from Ed from Nomura.
Ed Santa Vaci
We've seen a pretty steady improvement in that leverage. I was wondering if you could talk a little bit about your long-term target there or at least what your target is for 2018?
Raul Jacob
Okay. For this point, we're not considering any additions to leverage.
Basically, we're happy with the current deposition of the company. And as we have reported in the past to the market, we were focusing on reducing the total debt-to-EBITDA ratio.
And as you well mentioned, Ed, we have -- we're achieving that now. So we're happy where we are.
Now having said that...
Daniel Quintanilla
Sorry. Go ahead.
Raul Jacob
Go ahead, Daniel.
Daniel Quintanilla
I'm just going to point out that we think we did the right decision in timing regarding our bond issuance 30 years last time around. And that proven to give us a lot of flexibility, I mean, regarding capital structure to complete Buenavista and now to complete Toquepala.
And now, so I think, we've been throughout this last cycle, so to speak, we've been very prudent, and we did very conservative. And I think -- we're not looking at doing anything else at the moment as Raul pointed out.
Ed Santa Vaci
So you're kind of comfortable with this, at least on a net basis 1.8x is you think where you'd like to keep the business? There's no real meaning to get it lower?
Daniel Quintanilla
Yes. I mean, I know those debt markets are attractive now again.
But I mean we considered it, I think it was last board on issuing again. And given the cash generation of a company and how the projects for the CapEx will be become, peak again year-by-year as Raul pointed out, we feel comfortable now.
Yes, the answer is yes.
Raul Jacob
Let me add to that, that next year, we will have 100,000 tons of very low cost additional copper units, 1,000 tons of new production. And that will improve our EBITDA and the ratio given that we will have same debt level will be even lower than where it is right now.
Ed Santa Vaci
Sorry, I guess that was my original question as we get this incremental production, higher EBITDA lower leverage as you approach call it the low 1x area. Should we then think more opportunities whether it's dividends or may be M&A opportunity or other expansion plans?
What's the real optimal leverage position for the company?
Raul Jacob
Well, in terms of -- okay, first, where we are, as Daniel mentioned, we're happy to where we are. We are not thinking about anything new regarding our leverage position at this point.
And it's going to improve just because of the advancements of our new investments. As I say, very profitable additional production is about to come on the second quarter of next year.
That is very good news for us. Now having said that, the company is also have to have a very responsible attitude towards opportunities.
And we mentioned at the beginning of the call that we're looking into Moquegua project as a possibility. We're still starting on that.
And if there are good opportunities out there in the market to go ahead with new transactions, we will certainly review them and recommend as management to our board on what we think should be done.
Operator
Our next question on line comes from John Tumazos from John Tumazos Independent Research.
John Tumazos
It's very impressive how many projects Southern Copper has as it triples production compared to 2013, doubling and then with the new program you described January 31 of more projects. Do you have enough people resources to take on another project as you bid for Moquegua, if I'm pronouncing it right.
And could you describe the ore grade there? And if any projects might fall out of the mix as another one enters because it's so challenging to do so many things at once.
Raul Jacob
Thank you very much for your comment, John. As you well mentioned, the company has been growing very consistently.
In January, we announced to the market that our having -- we're very close to the million tons of capacity. Next year, when we add 100,000 tons of new capacity, we'll have over 1 million tons of capacity, which will be reflected in 2019 productions.
But a portion of that in 2018 as well. Now on the human resources that the company has.
Well, we have been delivering these projects. And as we always indicate, on time and under budget, which is one of the key characteristics of the company because by doing that we achieve a good return to our shareholders.
Now in terms of...
Daniel Quintanilla
Let me add... Go ahead.
Raul Jacob
Go ahead please.
Daniel Quintanilla
I was just going to add, John, that you're right. We were conscious of the challenges of this massive project.
And if you look at it from the board perspective, I mean, we kind of pushed the gas on Buenavista expansion from 180,000 to 500 first. And that is of course, the brownfield.
Then we moved -- I mean, when it was completing the concentrator the #2, the second concentrator which is -- was what's after the #3 SX-EW facility. Then we started moving when took Toquepala expansion, which is also a brownfield.
And so we were conscious of the challenges and I think we've been able to move or manage our resources in the best way possible. When we mentioned Moquegua, I think that's a project that you're referring to.
The government is selling it and is putting it in the market let's say, or marketing it and it is in our backyard in Peru. I mean we ought to look at it.
That doesn't mean we're going to go there and develop it tomorrow and competing with the other projects that we do have more scheduled and more developed like Tia Maria. So thank you for asking because, I think, I needed to clarify that, that doesn't mean that we're going to start of the Moquegua and Tia Maria and all this projects at the same time.
I mean that wouldn't be the wisest thing to do.
Raul Jacob
Yes. At the same time, let me say that we are currently in a market that has the resources, the human resources available.
What I mean is that there is a good pool of engineers and technical people that we can use in our projects because were not at the peak of an investment cycle, but I believe at the beginning of one. On the Moquegua ore grade for copper is 0.65%.
It has molybdenum and gold as by-products. Molybdenum it's important.
Gold is not that important.
Operator
Our next question on line comes from Camilla Ramirez from the [indiscernible].
Unknown Analyst
Just one question from me. I was wondering if you're going to explain the increase in accounts receivable?
I'm seeing in this quarter compared to the quarter -- second quarter last year.
Raul Jacob
Yes, Camilla. Thank you for your question.
It has 2 reasons. The first one is a much higher metal prices, generally speaking.
All the prices that we produce, except silver, have increased. So that is certainly increasing by itself, accounts receivable.
And we had -- it's more like a timing thing. We had at the end of September, some shipments that were delayed due to the closure of the Ilo Port in Peru.
So our collections were not as quick as our sales given a higher accounts receivable. We don't think that this is -- this is like a onetime thing.
I mean the prices will be there but we don't think we will have this when we close the year.
Oscar González Rocha
And the pricing, you have to compare not the average of the years but compare the September to September pricing, which is much higher because of the quick increase in the prices this year. So that's more around a 40% copper price increase than the average of the year.
Is that clear?
Unknown Analyst
Yes.
Operator
Our next mission on line comes from Petr Grishchenko from Barclays.
Raul Jacob
Peter, are you going to ask the question? I think he has left the conference, Richard.
Operator
Our next question comes from Carlos De Alba from Morgan Stanley.
Carlos de Alba
Could you please give us the guidance cost before by-products for the coming year? And also, do you have to -- do you happen to have the specific production of Toquepala this quarter and last year?
And what can you comment on the trend that we're seeing in that mine. Not Toquepala, sorry, La Caridad.
Raul Jacob
Okay. Your first question is on cash cost.
We're expecting, as I said, the reduction in cash cost for next year. For this year, we're about $1.45.
Most likely we'll end up at that level in the fourth quarter. For next year, we're expecting $1.34 that's for 2018.
For 2019, where we'll have Pilares in place, we should have a reduction in cash cost down to about $1.34, again, same number, slightly lower, maybe a little bit lower than the one for next year. And it will be at around that level until we have the other investments kicking in.
We will have also some improvements in our zinc production because of the Buenavista zinc in 2020. For instance, we will increase our credits given the same price deck.
Our freights should increase from about $0.55 that we have now to about $0.65 in 2020. On your second question, was on the Caridad production profile, right?
Carlos de Alba
Correct.
Raul Jacob
Yes. Well, in the case of Caridad, we are mixing -- we will be -- we will initiate the mixing of material with Pilares next year -- I'm sorry, in 2019.
And that should add some production to our Pilares operation. Currently, Caridad it's -- will be producing this year about 133,000 tons of copper.
For next year, we're expecting it to decrease a little bit. We're still looking into this as a forecast.
We're expecting a reduction of about 20,000 tons in La Caridad. And that should hold for a few years.
So when you get the new production of Pilares, you will have a net increase in production at this unit.
Operator
And we have a follow up from Lucas Pipes.
Lucas Pipes
Raul, I think you mentioned earlier on the call that you are at the beginning of an investment cycle. And I wondered in the context of the conversation about hedging, would you be considering maybe hedging your input factors, be it oil, diesel, foreign exchange, especially in light of the substantial capital projects that you're considering?
Raul Jacob
My comment was on the industry. We're still investing and we have -- as we have always reported to the market, a significant pipeline of projects ahead.
Now the reasons for investing or hedging on our major supplies are basically a market decision. So whenever we see a reasonable condition for the market to good opportunity for a hedge, we'll consider and advise on that matter to a special committee that takes care of these matters.
At this point, we're not looking at that.
Operator
And our next question comes from Jens Spiess from Morgan Stanley.
Jens Spiess
Yes. My questions has been answered.
Operator
Our last question on line comes from Alfonso Salazar from Scotiabank.
Alfonso Salazar
A quick question on Cuajone. Similar to the question on Caridad.
If you can tell us what is going to be production in the next few years. And also, I remember that a part of the projects you are developing there, you just have a project that expansion at Cuajone.
So if you can comment on what's going on with that project?
Raul Jacob
You're welcome. Thank you very much for your question, Alfonso.
Cuajone is expected to produce this year about 157,000 tons. And for next year, and the years after that, we're expecting it to be in the range of 162,000 to 165,000 tons.
The reason for this improvement is that we will have the new facility that I mentioned at the call that has been constructed and finished in Cuajone for crushing and moving material. That facility alone will save our Cuajone cost by about $23 million per year.
So this is a very interesting project in terms of cost control. On the operational side as I said it's $23 million.
On the CapEx side, the project will certainly reduce our need for mining trucks. And that is also one of the benefits of this investment.
Now on the possible expansion for the Cuajone mine, I'll ask Mr. Oscar González Rocha if he can comment on that please.
Oscar González Rocha
Yes, Raul. No, we are not thinking to do any expansions right now until we finish the Toquepala expansion.
Then we will decide if you continue. And it's a small expansion from 85,000 tons of milling capacity to 120,000 in order to match Toquepala.
Operator
We have no further questions at this time.
Raul Jacob
Okay. Thank you very much, Richard.
Well, with this we conclude our conference call for today. This is the third quarter of 2017 conference call.
We certainly appreciate your participation and hope to have you back with us when we report the fourth quarter and full year 2017. 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.