Raul Jacob Ruisanchez - Principal Accounting Officer and Comptroller

Felipe Hirai - BofA Merrill Lynch, Research Division Garrett S. Nelson - BB&T Capital Markets, Research Division Alexander Hacking - Citigroup Inc, Research Division Maria Eugenia Fernández Pouchan - Santander, Equity Research

Thank you very much, Sandra, and good morning, everyone, and welcome to Southern Copper's fourth quarter earnings conference call. In today's conference call, we will begin with an update of our view on the metal markets.

We will then talk about Southern Copper's key results related to production, sales, operating cost, financial results, expansion projects and capital spending program. After that, we will open the session for questions.

Regarding metal markets and prices. During the fourth quarter, metal markets continue to be driven by the negative macroeconomic events that affected consumer expectations, the most important ones being Europe's debt crisis, the so-called fiscal cliff that affected the U.S.

economy and the slowdown of the Chinese economy. As we have mentioned before, 2012 was also a transition year, with administration changes or elections in several key countries, including China and the U.S.

-- and the United States. Regarding the copper market, even though we believe these metal fundamentals are sound, demand has been repeatedly affected by the mentioned macroeconomic factors and the economic slowdown that characterize elections and administration changes.

At present, we perceive a more positive environment as some of these matters has been already solved or are perceived to have a more positive outlook from now on. In China, after several monetary easing measures were taken in the second half of 2012, different analysts expect a growth performance in Chinese copper demand of approximately 8.5% for 2013, much better than the 5% growth estimated for 2012.

China represented 41% of the world demand in 2012. The expected strong growth of this country and other emerging economies, should give support for an estimated copper demand of 5% in 2013.

In the United States, demand appears to be stronger as consumer confidence has increased and the economy is recovering. This has been reinforced by positive reinforced by positive news related to the car industry, the housing market and employment that seem to have offset macroeconomic concerns related to the fiscal balance.

Even though the U.S. represents to date about 8% of the world demand for refined copper, the recovery of the economy is key to consumer demand -- to copper demand as the U.S.

is the most important secondary copper consumer worldwide, affecting copper demand and other economies. Finally, after a severe 2012, where European demand is estimated to have decreased by approximately 7%, there are signs indicating a copper demand increase of 2% for 2013.

It should be mentioned that Europe is now approximately 19% of the world demand for refined copper. On the supply side, we think that several structural factors such as labor stoppages, technical problems and other issues are still affecting copper supply, reducing the net impact of production coming from new projects and expansions.

Southern Copper believes it is positioned to take advantage of this situation through our aggressive investment programs for organic growth, aimed to increase production from our current capacity of 640,000 tons to 1.2 million tons by 2017. Regarding our copper production.

In the fourth quarter of 2012, copper mine production increased by 1.5% to 163,799 tons compared with 161,367 tons in the strong fourth quarter of 2011. This increase was the result of higher production at the La Caridad, and Buenavista mines, partially offset by lower production at the Toquepala and Cuajone mines.

These changes in productions mainly due -- were due to changes in ore grades and recoveries in the ore operations. For the year 2013, we're expecting to produce 650,000 tons of copper.

Of those, 640,000 will come from our own -- our mines while 17,000 from -- while 7,000 from third parties copper concentrates. Molybdenum production decreased by 9.6% in the fourth quarter of 2012 from -- when compared to the fourth quarter of 2011 due to lower production at the Peruvian mines, mainly resulting from lower recoveries.

This production was partially offset by record productions at La Caridad that had an increase in production of 4.7% due to higher grade and recovery. For 2013, we plan to produce 19,800 tons of molybdenum, which is 8% more than our 2012 production.

Of these, approximately 1,700 will come from our new molybdenum plant in Buenavista. Silver mine production increased 0.4% in the fourth quarter of 2012, principally as a result of higher production at our Buenavista mine that decreased silver production by 10% and La Caridad that increased silver production by 10.8%.

These good numbers were good performance, and our Mexican operations were partially offset by lower production at the Peruvian mine that decrease their silver production. For 2013, we expect to produce and sell 16.3 million ounces of silver.

Zinc production. It increased by 11.4% in the fourth quarter of 2012 when compared to the same quarter of 2011.

That was mainly as a result of higher grades and recoveries, as well as a gradual production recovery at the Santa Eulalia mine after the flooding problems of prior years. These problems have been completely solved.

In 2012, the company's zinc production increased by 7.3%. For 2013, we expect to produce 99,100 tons of zinc from our mines, a 10% increase in the zinc volume when compared to 2012.

Regarding our financial results. For the fourth quarter of 2012, sales were $1.6 billion, slightly lower than sales of the fourth quarter of 2011.

Copper sales decreased by 0.4%, but were helped by higher prices that increased 5.6% in that -- in the fourth quarter. And regarding by-products, we have significantly better volume sales of zinc.

Sales of zinc increased by 18.5% and at the lowest offset lower prices and lower volumes in molybdenum. Operating cost.

Our total operating cost and expenses increased by $71.1 million or 9.3% when compared to the fourth quarter of 2011. The main cost increments were in fuel and power costs that increased together $10.1 million.

Labor costs increased by $14.9 million; other operating materials, $16.5 million; workers' participation, or profit sharing, $17.3 million; exchange rate depreciation increased costs by $24.6 million. And these cost increases were partially offset by lower mining royalties, purchased copper from third parties that we obviously reduced after we have recovered our Buenavista operation and inventory consumption.

Regarding our EBITDA, excluding the legal fees for $316 million charged in the third quarter, EBITDA for the year 2012 was $3,772.6 million. That is a 56.6% margin of EBITDA to sales.

And for the quarter, it was $894.4 million, a 54.2% margin for the fourth quarter of 2012. Cash costs.

Operating cash cost per pound of copper before by-product credits was $1.80 per pound in the fourth quarter of 2012 compared to $1.78 per pound in the third quarter of 2012. The $0.09 per pound increase in operating cash cost is the result of the already mentioned cost increments.

Southern Copper operating cash costs, including the benefit of by-product credits, was $0.903 per pound in the fourth quarter of 2012. Regarding by-products.

We had a total credit of $342 million or $0.90 per pound in the fourth quarter of 2012. These figures compared with a credit of $337 million or $0.96 per pound in the third quarter of 2012.

The higher by-product credit comes from zinc, molybdenum and sulfuric acid, which compensates for the lesser volume -- lesser values for silver, gold and lead. With the exception of molybdenum, all by-product prices have increased between the third and the fourth quarter of 2012.

Net income in the fourth quarter was $531.8 million, 32% of sales. Net income attributable to Southern Copper shareholders in the fourth quarter was the same number, with diluted earnings per share of $0.63.

Focusing in our capital expansion and expenditures. Capital expenditures were a record of over $1 billion, $1,051.9 million for the year 2012.

This is $71.6 million higher than what we spent in 2011. The increase reflects our strong commitment to the company expansion programs at Buenavista and other properties.

In 2012, $615.6 million was invested in our Buenavista projects. In 2013, we will continue our ambitious yet achievable investment program to increase copper production capacity by approximately 84% by 2016 from 640,000 tons to 1.2 million tons.

Our Buenavista projects are continuing the development of this -- we are continuing the development of this $2.8 billion investment program, and this unit, which will allow us to increase its copper production capacity by approximately 170%. That is from 180,000 tons to 488,000 tons by 2015.

The new concentrator with the molybdenum circuit project includes a new concentrator with an estimated annual production capacity of 188,000 tons of copper and 1,850 tons capacity molybdenum plant. The project will also produce annually 2.3 million ounces of silver and 21,000 ounces of gold.

The total capital budget of the project is $1,384 million. Current overall progress is 36%.

Regarding mine equipment, through December 31, 2012, we have received 2 of 8 shovels, 37 of 56 trucks and 7 of 8 drills, and all of these units are in operation. The total capital budget of the project is $504.8 million, and our overall progress is 52%.

The SXEW III Project is moving forward. Plant equipment from Tia Maria have been transferred to Mexico, and will allow us to increase the annual plant capacity from 88,000 tons to 120,000 tons.

The total capital budget of the project is $444 million, and overall progress on the project is 39%. The final testing of the Quebalix III project concluded in January, and the project will start operations late in February.

This project consist of a crushing, conveying and spreading system that will improve the SXEW copper production by increasing recovery and reducing hauling costs and the required time to extract copper from mineral. The total capital budget of the project is $75.6 million.

Regarding the construction of our molybdenum plant for the current concentrator, the final testing of the plant will start by the end of the first quarter of the year. The plant is expected to produce 1,700 tons of molybdenum in 2013 and to have an average annual production of 2,000 tons of molybdenum per year.

The total capital budget of the project is $38.2 million. The Angangueo project, to develop an underground polymetallic deposit in Michoacan, Mexico is moving forward as scheduled.

After our recent evaluation of Angangueo's resources, we are increasing the milling capacity of the project from 1,200 tons per day to 2,000 tons per day. Therefore, our Board of Directors approved the total budget increase of $43.7 million from $131 million to $174.7 million.

The revised production plan indicates that Angangueo will have an average annual metal content production of 10,400 tons of copper and 7,000 tons of zinc in the first 7 years of production. Over the life of the mine, average annual concentrate production will contain 2.4 million ounces of silver and 1,500 ounces of gold.

This project is scheduled to begin production in the first half of 2015. Regarding the Peruvian project and focusing on the Toquepala expansion.

Through December 31, 2012, we have spent $231.8 million in this project. These expenditures include initial construction work to build a new crusher and a conveyor belt system to replace current rail haulage and other operating costs, which will allow for future savings estimated in $5.5 million per year.

Cuajone project. Through December 31, 2012, we have spent $136.6 million on 2 projects to increase productivity for this unit, the Variable Cut-off Ore Grade project and the High-Pressure Grinding Rolls project.

Current production is showing the initial benefits of the Variable Cut-Off project. We expect that both projects will be at full capacity by the second half of this year.

In the case of our Tantahuatay investment, these mines, in which we hold a 44.2% interest, is located in Cajamarca in Northern Peru. In 2012, we have recognized $48.7 million in earnings for our share of net income of the mine.

For 2013, we expect to spend $1.8 billion for capital expenditures at our operations. Of those, approximately $1.4 billion will be in our Mexican operations and $400 million in the Peruvian projects.

Regarding dividend, as you know, it is the company policy to review at each Board Meeting the capital investment plan, cash resources and expected future cash flow generation from operations in order to determine the appropriate quarterly dividend. Accordingly, at the close of the market on January 25, 2013, the Board of Directors authorized a cash dividend of $0.24 per share of common stock payable on February 26 of this year to shareholders of record at the close of business on February 13, 2013.

With this in mind, ladies and gentlemen, thank you very much for joining us. And we would like to open up the forum for questions.

My question is related to your CapEx in the next few years. Specifically, I just want to make sure I understand what happened with the cash -- with the CapEx for the Buenavista project, if there was any change in the CapEx mostly because now you're showing the line of mine equipment, with a total budget of $500 million.

So I just wanted you to understand how this compares with your previous CapEx of $1.4 billion, if there is anything included in the $500 million. Also, because we saw there's some differences between the pieces of equipment that you share -- that you show for example, shovels or truck.

And my second question is related to the Tia Maria project that's listed in your project. So if you could just give us an update on what's the status if there's any changes on scope, CapEx and timing?

Okay, thank you very much for your question, Felipe. Let me address first your concern on the capital expenditures.

On this quarter, what we're reporting is we're -- we have made a re-class of several expenses that were related to our Buenavista projects. One of them was this mining equipment that was spread through different investment initiatives, and we have now consolidated under mine equipment.

And we're showing the budget that this project has. This is new -- not a new expense.

This is basically a geographic reorder of our capital budget. In certain projects, there has been some slight adjustments regarding to their budgets.

The current forecast for the company for the years 2013 through 2017 are the following: For 2013, we're expecting to spend $1.8 billion in capital expenses; for 2014, $2.1 billion; for 2015, $1.4 billion; 2016 will be the year where we are completing these package of projects, we should see a reduction in our CapEx expenditures. We're estimating currently about $600 million for that year, and for 2017, another $600 million.

So that's our current capital expenditures budget. And your second question was about Tia Maria.

Could you repeat it, your concern please, Felipe?

Yes, before we go to Tia Maria, Raul, so I just wanted you to make sure, so this $500 million that you've seen on mining equipment, where was those in your previous budgets? So was that considered before in the Buenavista project, or any of the other projects or not?

And actually, my question on Tia Maria is just a general update on the project.

Okay. Yes, the $500 million in mining equipment was part of our Buenavista project, but was not identified as such.

We -- what we were doing, what we have done, is specifically grew several small investments in -- under this mine equipment budget of $504.8 million. On Tia Maria, well, the company has finished first review of the environmental impact assessment study.

We're currently working with the local communities, as well as preparing the final draft that will be presented to the authorities during, at the end of this quarter or at the beginning of the second quarter.

My first question is on to Toquepala. Could you talk a little bit about it?

It seems the CapEx for this year was below at least the previous guidance. Any threats of a delay on that one?

And also, I would like to hear your thoughts on news flow about changes in mining taxes in Mexico. What are your views, anything that you think can happen there?

Okay. Well, first, on Toquepala, the company is doing some progress in our talks with the local communities.

In very recently, we signed an agreement with the Candarave community. By this agreement, the company will spend through the life of the project approximately $98 million for social works with these community.

We think that this is a good step in the right direction for the company, and that will certainly help the project. Currently, we are scheduling the beginning of the Toquepala expansion by 2015.

Regarding the -- regarding mining royalties in Mexico, we're still at the very initial stage of the talks. We understand that government officials are considering this as an option, but we don't have at this point any official clearness on how this is going to be implemented.

Raul, you mentioned the CapEx guidance through 2017. Could you go over your copper production guidance through 2017?

Has that changed at all?

Yes, Garrett, and thank you for your question. For this year, I mentioned already that we're expecting to produce 650,000 tons of copper.

For 2014, it's going -- we are expecting to produce 725,000 tons; for 2015, 941,000 tons; 2016, 1,181,000 tons; and 2017, 1,175,000 tons.

Okay. The CapEx numbers as you mentioned earlier, does that include Tia Maria?

Yes, it does. They include Tia Maria..

A couple of questions. First question, regarding the copper production guidance this year, 650,000 tons.

Is that all from your own mines? Or is that including the third-party concentrate?

If you could clarify that, it will be good. And then second question, can you give us any guidance on what kind of cost inflation you would be expecting next year?

I'm referring to the cash cost before by-products if it's possible.

Yes, okay. Regarding the -- regarding production, our guidance for 2013 includes 10,000 tons of third-party copper concentrates.

Now if we have more production from our own operations, we will replace that copper from third parties by our own copper that as you know, it's much more profitable than copper that you buy on the spot or on the market. Regarding cost inflation, we're expecting an increase in cost before by product credits of about $0.09.

And that increase should be offset by our higher -- by credit contribution through the year. As I mentioned, we're expecting to increase our molybdenum production by a certain amount, as well as our zinc production.

In the case of molybdenum, we are having the beginning of the operation of the new molybdenum plant in Buenavista in 2013 that, that will add to our molybdenum-based production about 1,700 tons in 2013. In the case of zinc, we are recovering the production at our operations, as well as getting better ore grades in the IMMSA mines.

And that will increase production by about 10% in 2013. So when you value the contribution of these 2 by-products, what you have is an offset in the increasing in cash costs.

For 2013, we're expecting to maintain our cash cost at its current level.

Can I ask you just to repeat the guidance for moly production next year? I missed it earlier, sorry.

Sure. We are expecting to produce 9,800 tons of molybdenum, that's 8% more than what we produced in 2012.

Yes. Just to clarify, GBM, not UBS.

Could you give us an update on your labor negotiations that you have with unions in Peru? Any agreements so far?

Yes. We have -- in total, we have had 8 unions.

These 8 unions -- these unions have about 2,900 workers that on a total labor force of about 4,500 workers, okay? So about 65% of the workforce is unionized, and on the 8 unions, as I said.

We already signed a new 3-year labor contract with 3 of these 8 unions. These 3 unions represent 13% of the unionized workforce.

And we're currently in talks with the rest of the unions, the other 5 in Peru to close a deal. And we're expecting to have a 2-year labor contract.

The labor agreement with the 3 unions that already signed are calling for final salary increases of 6% in the first year, 5% in the second year and 5% for the last year of this 3-year agreement. Peruvian labor cost currently, it's 9% of the total cost of the company.

So with this, you may derive the effect of this in our cost. It's going to be moderate, basically speaking.

So when we could have more color on the agreement for -- with the next -- the other 5 unions?

Well, we're currently having talks with them. Once we have any news on this matter, we will report to market.

But currently, this is a point where you're having discussions that are for getting an agreement. We think that these talks are progressing on a very best positive way.

And we are expecting to have a deal short in time. We can't report anything else at this point.

I was wondering if you could provide us more guidance on Tia Maria. Perhaps your distribution of CapEx and will it be starting in 2013 or 2014.

Okay, thank you for your question. For 2013, we're considering to spend $56 million -- $46 million in Tia Maria.

That's our current budget. This is contingent to get the approval of the Environmental Impact Assessment through the year.

Our CEO has indicated that we expect to have this Environmental Impact Assessment approved in the second half of 2013, or certainly, consider that a condition for that would be having the goodwill from the local communities regarding this project. So that's what we have budget.

If the project go ahead -- goes ahead, then we will be spending a little bit north of $250 million per year in order to build the plant and have it finished and in operation by 2016.

Just to clarify some things that you mentioned. The first one is, if I'm not wrong, you said that you are -- or you're estimating 640,000 tons of copper production for 2013.

The second point is you mentioned the CapEx from 2013 to 2017, and as I understand, it's -- all these together, it's about $6.5 million -- $6.5 billion of CapEx through this period. And the last one is regarding the Tia Maria project.

You have just said that you previously mentioned that you are waiting to receive the approval from the environmental impact by the first quarter of this year or the beginning of the second quarter.

Okay, thank you for your questions, Eugenia. First, on the production, let me try to clarify the information.

We're expecting to produce from our own operations about 640,000 tons of copper in 2013. On top of that, we purchased third-party's copper to fill up our smelters.

We expect to produce from third-party 10,000 tons of copper in 2013. Now the addition of those 2 is an estimated production for the year of 650,000 tons of copper.

That's for 2013. On the Tia Maria, we are -- we will be presenting the Environmental Impact Assessment by the end of this quarter or the first of the second quarter of this year.

That's the Environmental Impact Assessment that the company is preparing for this period. In the second half, we should have -- we expect to have a decision on the Environmental Impact Assessment project.

Obviously, we would certainly like it to be positive and in favor moving forward with the project. That's what we are focusing on.

We're currently working towards that direction. And I -- could you repeat your last question, please?

Yes. And the last one is about the CapEx that you mentioned.

You said that in 2013, you will spend $1.8 billion. Then I understand $2.1 billion in 2014, $1.4 billion in 2015 and then $600 million in 2016 and '17, which implies $6.5 billion of CapEx in mining equipment.

Is it okay?

Well, it's in the whole package of the projects. The numbers are okay, I will repeat it for the benefit of our audience as well.

So for the year 2013, it's $1.8 billion; for 2014, $2.1 billion; 2015, $1.4 billion and then for 2016, $600 million, as well as $600 million for 2017. That's our current expectation on capital expenditures.

It's for the whole package of the company projects. That -- let me add, that includes about $300 million for maintenance capital expenditures.

Sorry, can you repeat, $300 million of...

For replacing equipment that has finished its economic life, we usually spend about $300 million per year.

My question relates to the number of shares of stock outstanding. Your 10-Q for the third quarter said that they were 845.55 million shares outstanding as of October 25, 2012.

Your income statement has 845.6 million weighted average shares outstanding for the 3 months. But your balance sheet says there's 846.0 million shares outstanding as of December 31.

My question is did you sell some treasury shares or otherwise issue shares? And if yes, do you plan to continue to do so to finance your CapEx?

No. The second answer is that we don't plan to sell shares in order to raise capital.

What we are doing -- what we require financial support for our projects, is -- it's tapping the debt markets. That's what we have done in 2012, as well as in 2010, very successfully.

We're reporting that in our press release as well. The difference in figures that you indicated, Mr.

Richmond, is related to our activity in the market. We go in the market and buy shares on a regular basis.

We have a program that hasn't finished yet. And besides that, some of our board Members or our Board Members are being compensated with shares, as indicated in our Proxy Statement.

So the number of shares vary around the numbers that you mentioned, that again 845 million shares -- 846 million shares, pending on the time in the year. In this case, you are comparing the numbers that we have as of December 31, which were as I mentioned, 846 million shares, with the weighted average through the quarter, it was 845.6 million.

So through the quarter, we had some activities that at the end of the process right with the shares at the closing of the year of 846 million.

Raul, sorry, just one quick follow-up. Can you remind us what your sustained CapEx is per year?

Is it $400 million?

About $300 million, Alex. I think that a good proxy for that is our depreciation expense in our financials.

It's around a little bit less than $300 million that's what we are considering at this point.

Yes, thank you very much, Sandra. Well, with this, we'll conclude our conference call for the fourth quarter results.

We certainly appreciate your participation, and we expect to have you back with us when we report the first quarter of 2013 results by the end of April. Thank you very much, and have a very good day today.