Southern Copper Q2 2024 Earnings Call Transcript

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Provided by Quartr
July 22, 2024

Key Takeaways

  • Southern Copper reported Q2 net sales of $3.818 billion, up 36% year-over-year, with adjusted EBITDA rising 61% to $1.797 billion and a margin of 58%.
  • Copper production in Q2 reached 242,474 tons, and the company maintained full-year 2024 guidance of 963,200 tons.
  • Operating cash cost, including by-product credits, fell to $0.76 per pound in Q2 2024, marking a 29% sequential reduction and strengthening unit margins.
  • The new Buenavista zinc concentrator is fully ramped up, driving a 71% quarter-on-quarter increase in zinc output and lifting 2024 zinc production guidance by 86% to 121,800 tons.
  • Tia Maria activities have resumed with its $1.4 billion capital budget under revision; the project aims to deliver 600 direct jobs at start-up and $17.5 billion in exports over 20 years, though final approvals and timelines remain pending.
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Earnings Conference Call
Southern Copper Q2 2024
00:00 / 00:00

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Operator

Good morning and welcome to Southern Copper Corporation's Q2 and six months 2024 results conference call. With us this morning, we have Southern Copper Corporation's Mr. Raul Jacob, Vice President, Finance, Treasurer and CFO, who will discuss the results of the company for the Q2 and six months 2024, as well as answer any questions that you may have. The information discussed on today's call may include forward-looking statements regarding the company's results and prospects, which are subject to risk and uncertainties. Actual results may differ materially and the company cautions not to place undue reliance on these forward-looking statements. Southern Copper Corporation undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. All results are expressed in full U.S. GAAP. Now I will pass the call on to Mr. Raul Jacob.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

Thank you very much, Carmen. Good morning, everyone and welcome to Southern Copper's Q2 2024 results conference call. At today's conference, I'm joined by Mr. Oscar González Rocha, CEO of Southern Copper and board member, as well as Mr. Leonardo Contreras, who is also a board member. In today's call, we will begin with an update on our view of the copper market and then review Southern Copper's key results related to production, sales, operating costs, financial results, expansion projects and ESG. After this, we will open the session for questions. Now let us focus on the copper market. The London Metal Exchange copper price increased 15% from an average of $3.85 per pound in the Q2 of 2023, up to $4.42 this quarter.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

Based on the production cuts announced by several producers and other information to date, we're expecting a market deficit of about 217,000 tons of copper for 2024. At this point in time, we estimate that the copper supply will increase slightly by 0.6%. That's, that's about half a percentage point. Looking at the demand, even though we see weak China's demand, mainly from its real estate market, a resilient U.S. economy and new demand from decarbonization technologies as well as artificial intelligence are supporting copper demand and prices. Now let's look at Southern Copper's production for the past quarter. Copper represented 76% of our sales in the Q2 of this year. Copper production increased percent in the Q2 in quarter-on-quarter terms to stand at 242,474 tons.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

Our quarterly results reflect a 15% increase in production in Peru and this improvement was driven by growth at the Toquepala mine, which increased its production by 21%, which was boosted by higher ore grades. Production at our Mexican operations increased by 0.7% in quarter-over-quarter terms, mainly due to higher production at our La Caridad mine, partially offset by a decrease in the production at Buenavista and Inc. For 2024, we expect to produce 963,200 [Technical Difficulty] 2023's final print. This growth will be fueled by recovery at our SX-EW facilities at Buenavista and by the copper production of our new Buenavista Zinc concentrator, which is operating at full capacity. Molybdenum production represented 12% of the company's sales value in the Q2 of this year and is currently our first by-product.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

Molybdenum prices average $21.69-$20.87 per pound in the Q2 of last year. This represents an increase of 4%. Molybdenum production increased by 21% in the Q2 compared to the same period of last year. This was mainly driven by higher production at the Peruvian operations and the Buenavista mine due to higher ore grades. These results were partially offset by lower production at La Caridad mine. In 2024, we expect to produce 27,400 tons of molybdenum, which represents an increase of 2% over our 2023 production level.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

Silver represented 5% of our sales value in the Q2 of this year, with an average price of $28.84 per ounce in the quarter, which reflected an increase of 19% versus the 2023 Q2 price. Silver is currently our second by-product. Mine silver production increased 8% in the Q2 of 2024 versus the same period of 2023. With the sole exception of IMZA, production rose at all our operations. Refined silver production increased by 28% quarter-over-quarter, which was mainly driven by growth in our La Caridad and Ilo refineries. In 2024, we expect to produce 20.6 million ounces of silver, an increase of 12% compared to 2023.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

Zinc represented 4% of our sales value in the Q2 of this year, with an average price of $1.29 per pound in the quarter, which represents a 12% increase in price compared to the Q2 of last year. Zinc mine production increased 71% quarter-on-quarter and totaled 29,419 tons. Growth was driven primarily by the 13,653 tons produced at the new Buenavista Zinc concentrator and by an increase in production at the Charcas mine. Refined Zinc production increased 6% in the Q2 of 2024 vis-a-vis the Q2 of last year.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

For the year, we expect to produce 121,800 tons of Zinc, which represents an increase of 86% over our 2023 production level. We're increasing our expected production for Zinc in 86% this year. This growth will be driven by production at our Buenavista Zinc Concentrator that will add 55,400 tons, which has ramped up to better than planned. For 2025 and on, we expect to produce 78,000 tons of Zinc per year. Financial results. This year, net sales were $3,818 million, which represented growth of 36% with regard to the Q2 of the past year.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

Expansion was primarily fueled by an increase in sales volumes of copper, which grew 5.5%, molybdenum by 21% increase, silver 32% increase and Zinc 78% increase in sales volumes. Also, we had an increase in metal prices for all of our products. Our total operating costs and expenses increased $111 million, or 8%, when compared to the Q2 of last year. The main cost increments have been in workers' participation, repair materials, contractors and operating materials, sales expenses, copper and other factors. These cost increments were partially offset by a decrease in the energy cost and in exchange rate variance. In the H1 of the year, we saw unitary cost reductions for several materials and services, such as grinding media, steel, explosives, tires and power costs.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

These savings, however, have been somewhat offset by higher costs associated with growth in production and sales volume and by an increase in maintenance and contractors' expenditures, which we are closely monitoring and controlling. Looking at our EBITDA, the Q2 of this year, adjusted EBITDA was $1,797 million, which represented an increase of 61% with regard to the $1,116 million registered in the same period of 2023, the Q2. The adjusted EBITDA margin in the Q2 of this year stood at 58% versus 49% in the same period of 2023. Adjusted EBITDA in the six months of 2024 was $3,215 million. This is 20% higher than what we had at the six months of last year.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

The adjusted EBITDA margin for the H1 of the year stood at 56% versus 53% in the same period of 2023. Cash costs. Southern Copper's operating cash costs, including the benefit of by-product credits, was $0.76 per pound in the Q2 of 2024. This cash cost was $0.31 lower than the cash cost of $1.07 that we had for the Q1 of 2024. This is a 29% reduction in cash costs. Before by-product credits, the operating cash cost was two dollars and fifteen cents per pound this past quarter. This is $0.04 higher than the value that we had for the Q1 of 2024.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

This 2% increase in the operating cash costs before by-product credits reflects an increase in cost per pound from production costs, administrative expenses, lower premium and these higher costs were partially offset by lower treatment and refining charge. Regarding by-products, we had a total credit of $716 million, or $1.40 per pound in the Q2 of this year. These figures represent a 34% increase in by-products when compared with the credit of $532 million or $1.04 that we had in the Q1 of this year. Total credits have increased for molybdenum, Zinc and silver and decreased somehow for sulfuric acid.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

The Q2 of 2024 net income was $950 million, which represents a 74% increase with regard to the $548 million registered in the Q2 of last year. The net income margin in the Q2 stood at 31% versus 24% in the Q2 of 2023. This increase was mainly driven by a 36% increase in sales, which was partially offset by higher operating costs related to sales volume, G&A and exploration expenses. On a year-on-year basis, net income was 24% higher than in 2023, for similar reasons. Cash from operations.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

Cash flow from operating activities in the six months of this year was $1,622 million, which represents a decrease of 18% compared to the $1,982 million posted in the six months of 2023. Cash flow in the H1 of this year was affected by a significant increase in working capital of $511 million, which was mainly driven by an increase in accounts receivable at our Mexican operations. For capital investments, our current capital investment program exceeds $15 billion and it includes investments in the Tía María, Los Chancas and Michiquillay projects in Peru and in the Buenavista Zinc, El Pilar and El Arco projects in Mexico. This capital forecast includes several infrastructure investments, including key investments to boost of the El Arco project.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

In the Q2 of the year, we spent $332 million on capital investments, which reflected a 31% increase over the figure reported in the Q2 of 2023 and represents 36% of net income this quarter. In the H1 of the year, we spent $546 million on capital investments, which represents 33% of net income and reflects the impact of an 11% increase in capital expenses year-on-year. Since there is a description of our main capital projects in Southern Copper's press release, I'm going to focus on updating new developments for each. This past quarter, we completed ramp-up at the Buenavista Zinc Concentrator, which graduated from project to operating unit status.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

The Zinc concentrator is operating according to our expectations, producing 23,300 tons of Zinc and 5,500 tons of copper to date. Our projections indicate that we will comply with the 2024 plan of producing 55,400 tons this year and we expect this facility to generate an average of 90,200 tons of Zinc and 20,000 tons of copper per year in the next five years. For the Peruvian projects, the Tía María project, which is a greenfield project. This project will use a state-of-the-art SX-EW technology with the highest international environmental standards to produce 120,000 tons of SX-EW copper cathodes per year. Southern Copper has consistently promoted the welfare of the population of the Islay province and the Arequipa region.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

As part of these efforts, we have implemented successful social programs in education, healthcare and productive development to improve the quality of life in the region. As of July 1 of this year, the company has restarted activities at the Tía María in the province of Islay, the Arequipa region and at the national level. We reiterate our view that Tía María will generate significant economic and social opportunities for the Islay province and the Arequipa region. In 2024, the company will, among other scheduled activities, install a live fence as well as 1,000 fog catchers. Southern Copper will also roll out earth-moving work this year. All these activities will generate 370 direct jobs in 2024 for the local population.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

In 2025, we expect to begin mine construction, which will generate 1,100 direct jobs with workers from the Islay province. When we start operations in 2027, the project will generate 600 direct jobs and an estimate of 4,800 indirect jobs. Our social programs in Islay total $6.3 million in the last two years. Our current programs promote a reduction in the cost of agricultural production by improving productivity with cutting-edge technology. Additionally, we're working to provide internet access to 4,600 school students. On top of this, we're committed to developing health facilities, high-performance schools, research centers and roads in the Arequipa region via the Works for Taxes mechanism. Tía María will generate significant revenues for the Arequipa region from day one of its operation.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

At current copper prices, we expect to export $17.5 billion and continue with $3.4 billion in taxes and royalties during the first 20 years of operation. The company is currently reviewing its historical capital budget for Tía María of $1.4 billion. We will update this budget by year-end. For Los Chancas project, located in the Apurímac region in Peru, the company continues to coordinate efforts with the Peruvian authorities to eradicate illegal mining activity. 40,000 meters to gather additional information on the characteristics of the Los Chancas deposit. For the Michiquillay project in the Cajamarca region of Peru, as of June 30 of this year, total advancing on the exploration project stood at 30%.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

We drilled 104,000 meters on a total program of 148,000 meters and obtained 33,991 core samples for chemical analysis. Diamond drilling is underway, which will provide data for cross-section interpretation, geological modeling and resource evaluation. This month, we will begin hydrogeological studies and in August, geotechnical studies will commence. We'll also assess the results of metallurgical testing in August. For environmental, social and governance, or ESG practices, we are glad to report that on August first of this year, the company will begin receiving eolic energy from the Fenicias Wind Park, which is operated by Grupo México Infraestructura. This will reduce our CO2 emissions by approximately 250,000 tons per year, which is equivalent to 7% of Southern Copper's carbon footprint.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

Southern Copper recently published its sustainability report, significantly improving the granularity and specificity of information regarding our performance, commitment and efforts in environmental, social and governance areas. Our Buenavista mine in Sonora, Mexico, has received the Copper Mark, the Zinc Mark and the Molybdenum Mark certifications for responsible production, following a third-party independent evaluation of our performance in environmental, social and governance matters, including on this, human rights. Consequently, all open pit copper, Zinc and molybdenum production from our Mexican operation is currently certified by Mark standards. For education, our Impulsa program seeks to provide our workers in Mexico with opportunity to qualify for certification of obtaining of primary and secondary education and bachelor's degrees.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

From 2022 to date, more than 970 people have participated in this program and 430 have graduated. At present, there are 540 workers actively participating in Impulsa. For human development, the sports advisor and coach of the Sonora Operations swimming team, Jorge Iga, qualified for the Paris 2024 Olympic Games after breaking the Mexican record for the 100-meter freestyle. Thanks to Mr. Iga's support, in 2024, 17 students from our academies participated in six top-level competitions. Dividend announcement. Regarding dividends as it is the company policy to review our cash position, expected cash flow generation from operations, capital investment plans and other financial needs at each board meeting to determine the appropriate quarterly dividend.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

Accordingly, on July 18th of this year, Southern Copper Corporation announced a quarterly cash dividend of $0.60 per share of common stock and a stock dividend of 0.0056 shares of common stock per share. This is payable on August 26th of this year, 2024, to shareholders of record at the close of business on August 9th, 2024. Ladies and gentlemen, with these comments, we end our presentation today. Thank you very much for joining us. Now, we would like to open the forum for questions.

Operator

Thank you and as a reminder, you need to press star, then one, one, to get in the queue and wait for your name to be announced. To remove yourself from the queue, press star one, one again. One moment for our first question, please and it comes from the line of Carlos De Alba with Morgan Stanley. Please proceed.

Carlos De Alba
Carlos De Alba
Analyst at Morgan Stanley

Thank you very much, Raul and everyone good talking to you. Raul, just on Tía María, I would like to understand the rationale behind the new environmental approval that, or study the company is doing or getting, trying to get from the government that would be in relation to a dam that would supply water and not pursue the original desalination plant, plus pumping station and pipeline. Given the less than positive history of the project, why would the company introduce this new uncertainty. Which honestly, in my opinion, is just gonna complicate matters for the company. Potentially, I wanna clarify with you, this is because the CapEx will be lower and/or the OpEx will be lower.

Carlos De Alba
Carlos De Alba
Analyst at Morgan Stanley

Can you talk about, like, the magnitude, if I'm correct, the magnitude of the return on investment that the company would get, with a dam, as opposed to a desalination plant. Or how much is the CapEx, for the desalination, the pumping station and the pipeline, relative to the construction of a dam and what is the difference in the OpEx going forward between the two projects. Thank you.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

Thank you very much for your question, Carlos. At this point, we're maintaining our approved project, which considers the diesel plant. This is what we're developing right now. If there is a possibility later on in time of including a dam to get the water that the project requires, we will consider that at this point, we're following our current diesel plant for the project. Regarding the costs as we have been reporting a capital expense of about $1.4 billion for the project, We are currently revising it because we want to add some facilities that were not considered in the first project.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

And we have obviously, we need to accommodate some inflation costs in the project total CapEx. For new facilities, I mean, a new road that will connect the project to the coast of Islay, not passing through the Tambo Valley. That will remove one of the concerns that the farmers of Islay or the valley have about the trucks and all the materials that will move on for the project construction, that will disturb the valley's environment. For avoiding that, we're considering building a new road that will. It's a 20-kilometer road, roughly speaking.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

And some other changes since the project was approved in 2014. We have seen some technological advances that we want to include in the capital budget as well. As we indicated in the press release, we are expecting to announce this by year-end, at the most. That's the current status.

Carlos De Alba
Carlos De Alba
Analyst at Morgan Stanley

Thanks. Just one clarification. You will build a road, not a railway, right.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

No, both things. The railroad will be for moving up the sulfuric acid and materials that we need to operate and down, basically, the production on a daily basis. However, for the construction phase and to communicate directly to the coast, there will be a road that will connect the plant and the facilities for the project with the coast of Mollendo.

Carlos De Alba
Carlos De Alba
Analyst at Morgan Stanley

All right. Got it. My second question is related to the outlook for cost before byproducts. If I missed it, I'm sorry if you didn't mention, could you please let us know how you see the evolution of your cash costs before by product, the benefit of by products.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

It's hard to know because you always have price variances either way. I believe that we will be at about $2 per pound before subtracting credits. Please keep in mind that those $2 now include the additional cost of our new concentrator for Zinc. It's all the cost of the company, which includes the cost of the by-product plants that are related to our production complex divided by the pounds of copper that we're producing. For this year, we expect it to be at about $2 and then it depends on the production level that we have.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

If we, for instance, in 2027, when we add Tía María to our current production profile, we certainly will reduce our cost before by-product credits because the Tía María expected cash cost is in the range, the lower range of $1+.

Carlos De Alba
Carlos De Alba
Analyst at Morgan Stanley

Thank you very much.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

You're welcome, Carlos.

Operator

Thank you. One moment for our next question and it's coming from Marcio Farid with Goldman Sachs. Please proceed.

Marcio Farid
Marcio Farid
Analyst at Goldman Sachs Group

Thank you. Morning, everyone and thanks for the opportunity. A couple of follow-ups on my side here. Firstly, how i think CapEx execution was a bit stronger than we were expecting for the quarter. It's still relatively half of yearly guidance, right. Just trying to understand if investments for Tía María are expected to be materially higher for this year. I think you had pretty much close to zero for Tía María in the guidance for this year. Are you anticipating some more disbursements related to that as investments seems to be quite remarkable at this point and how do you think about final year capex and for Tía María specifically as well.

Marcio Farid
Marcio Farid
Analyst at Goldman Sachs Group

And similarly for production, Pretty good numbers roughly in line with our estimates. We had, I think, guidance for the year around 950,000 tons. How are you thinking about final year guidance and your ability to reach the production guidance for the year at least. That will be my questions. Thank you.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

The second one is, how sure do we feel about the production guidance, right.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

Let me start by this one. We feel very confident that we will either maintain or improve our production guidance in the H2 of this year. We're seeing our new Zinc concentrator; it's certainly operating at a very good pace. We were very satisfied on that. On the H1 of the year, our SX-EW production at Buenavista was affected by some water scarcity that has been fixed. It's already. We're already getting even more water than what we expect to have due to a higher rainy season than we're seeing at the Sonora state. That is going to help our production of SX-EW copper for the H2 of this year.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

We have not included that as part of our current guidance and I believe that that will be an upside factor for us. Coming to your first question on the CapEx for Tía María. This year, we are spending, as I said, that we're doing a live fence that will be around the expected place for the new facilities for the project and we will basically spend much less than a project of this magnitude would require. However, we believe that we will be accelerating the capital expenditures for the project through the H2 of the year and for 2025, we're spending Tía María about $316 million.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

That will be for earthmoving activities and some other items that are related to the project. I mentioned the road that we want to build. That will be obviously a very important source of a new labor requirement, which is one of our priorities, to use people from the Islay province and the Tambo Valley specifically and then for the rest of the CapEx Tía María, we will, we will advise on before year-end on this.

Marcio Farid
Marcio Farid
Analyst at Goldman Sachs Group

Can I just quick follow-up as well. It sounds like, costs was a lot better on, after by-product base. Volumes are strong, obviously. We do not have the breakdown, by each product until, the full final financial statements are out. What do you think was the, the beat in terms of positive surprise for, after by-product costs and obviously by-products and and revenues as well, please.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

As I comment when we covered the cash cost portion of the presentation, we have had the benefit of both better prices and higher volumes. The new Zinc concentrator obviously was important for getting higher volumes and we have also a molybdenum production coming from our mines. Zinc, I mentioned already the impact of having a much higher Zinc production coming from the new, effectively, the new Zinc concentrator and silver comes in higher quantities, not only from our mines also as a by-product of the Zinc concentrator. Higher volumes and better prices, that's what in my view explain the positive surprise that you were mentioning, Martin.

Marcio Farid
Marcio Farid
Analyst at Goldman Sachs Group

That's great, Raul. Thank you very much.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

You're welcome.

Operator

Thank you. One moment for our next question. It's from the line of Alejandro Demichelis with Jefferies. Please proceed.

Alejandro Demichelis
Alejandro Demichelis
Analyst at Jefferies

Yes, good morning, gentlemen. Thank you very much for taking my questions. A couple of things. First is a follow-up on your net cash cost. Raul, if I'm understanding correctly what you were saying, which is higher volumes on Zinc, higher volumes of silver, then we should assume that that extra by-product revenues should be stable, obviously, with all the variations of prices then your net cash costs, should it kind of remain below the $1 per pound.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

Hopefully yes, we have to see where the prices are going through the rest of the year. We don't know where prices are going to be in the H2 of this year. Regarding volumes, I believe that we will, we will maintain the volumes that we're, we have been achieving, year to date for our by-products and as well as copper, I already mentioned on copper that we, we would like to improve from the forecast that we, that we mentioned for by-products also, we should maintain the production levels. Hopefully, prices will be the same or even better. We see a better forecast that's where we are now.

Alejandro Demichelis
Alejandro Demichelis
Analyst at Jefferies

Then it is a follow-up, obviously, from the last quarter. Maybe you can give us some kind of indications how we should think about or how you're thinking about dividends for the rest of the year. Should we assume it's like a 50/50 between cash and stock.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

I can only say that it's up to the board to make that decision. I think that the dividend as was approved having 50% in cash and 50% in shares is reflecting the new investment investment that we are undertaking, the Tía María investment, as well as some payments that we have to do for next year. If you see in our balance sheet, we have almost $500 million in debt repayment that we'll have to do in April next year.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

I believe that has made our board a little bit more conservative in the cash dividend and a way to reflect the good time that we're seeing in our market and the production levels of the company that has been joined by dividend in shares as well.

Alejandro Demichelis
Alejandro Demichelis
Analyst at Jefferies

That's good and just to confirm, you said that for Tía María, for 2025, the CapEx expectation is about $300 million, something like that.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

$316 million, that's the current budget. However, it's under review and we would like to accelerate our CapEx expenses in Tía María. We will obviously with the proper activities to move on.

Alejandro Demichelis
Alejandro Demichelis
Analyst at Jefferies

That's fantastic. Thank you very much.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

You're welcome.

Operator

Thank you. One moment for our next question that comes from Sofia Martin with GBM. Please proceed.

Sofia Martin
Analyst at GBM

Hi, thank you for taking my call. I was just wondering if you could share with us your copper production guidance for the next couple of years. Thank you.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

Certainly, Sofia. Hold on a second. For 2024, I already mentioned 963,200 tons. For 2025, we will have a slight reduction in production coming from the Buenavista mine and the open-pit operations of Peru. That will put us now at 921,000 tons. Then we will have an adjustment. All these adjustments are basically coming from lower ore grades. For 2026, we're expecting a little bit less than 900,000 tons. 2027, 967,000 tons and then when we get in 2028.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

In 2027 and 2028, we'll be getting the benefit of the Tía María full production and that will increase our production forecast to over 1 million tons, 1 million tons by 2028.

Sofia Martin
Analyst at GBM

Perfect. Thank you very much.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

yes and for the next years, even though we haven't received the board approval yet, we're considering an expansion of the Cuajone mine that will increase its capacity by about one third of what it is right now. However, that is not included in our current capital forecast. That is something that the company is working on.

Sofia Martin
Analyst at GBM

Perfect. Thank you very much.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

You're welcome.

Operator

Thank you. Our next question comes from the line of Hernan Kisluk with MetLife. Please proceed.

Hernan Kisluk
Hernan Kisluk
Analyst at MetLife

Good morning and thank you for taking my questions. Following up on the previous questions about dividends and also talking about Tía María and the CapEx that you need going forward, can you maybe remind us what are your capital allocation priorities. We think that CapEx will be higher then thinking about the cash position, the net debt level and the changes that you have been doing on the dividend front, how should we think about them going forward.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

Going forward, the company is focused, as it has been mentioned in several forums as well as these conference calls. We are focusing on organic growth. We already finished the new Zinc concentrator in buenavista and we are focusing on the projects that the company has, which are pretty much 100% owned by the company and Currently we are moving forward with Tía María. We already finished the Zinc concentrator in Mexico. We do have two other projects in Peru and one big project in Mexico, which is in Peru, the projects and in Mexico, El Arco and El Pilar.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

That are 2 projects and that's a part of our pipeline in mining, specific copper mining projects and besides that, for the future, we're also considering the construction of metallurgical complexes, 1 in Peru and 1 in Mexico, that will certainly be a way to process the long concentrate production that we have now.

Hernan Kisluk
Hernan Kisluk
Analyst at MetLife

Given the growth project that you have at that, how is it going to grow the asset base. Should we expect a stable net debt level for the next few years, or will it grow along with

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

I'm so sorry, I couldn't, I couldn't get what you said.

Hernan Kisluk
Hernan Kisluk
Analyst at MetLife

Net debt level.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

Net debt level.

Hernan Kisluk
Hernan Kisluk
Analyst at MetLife

Net debt. Should we consider that it will grow together with the asset base in the next few years.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

For now, we have been paying our total debt. We pay about $700 million in the last five years. Next year, we have the maturity of one of our 10-year loans or bonds that will mature, let's say, in april and it has a CapEx or a principal of $500 million and if we move on with projects, I believe that we will certainly touch the debt markets in the future. Tt this point, we have no concrete plans to do that.

Hernan Kisluk
Hernan Kisluk
Analyst at MetLife

Thank you.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

You're welcome.

Operator

Thank you. One moment for our next question. It's from the line of Alfonso Salazar with Scotiabank. Please proceed.

Alfonso Salazar
Alfonso Salazar
Analyst at Scotiabank

Hi, Raul and good day. Two questions on my side. The first one is regarding production and sales levels. For several quarters now, we have seen that production is above shipment. Just wondering what is behind this and if there is any reason in the long term to assume that these numbers shouldn't be the same. The second question is regarding permits for tailings dams in Mexico, which we heard that some companies are having problems to secure these permits and they have to slow down production, or they are considering having to do that in the future unless they get these permits. If there is any situation like that in your case and also, if there's any update on the water pipeline that you need for Buenavista.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

We have the difference that you mentioned, Alfonso. It refers to the difference between the copper contained in our mine production vis-à-vis the refined copper that we sell. As we sell about 75% of all the copper production that we do is sold as refined copper or further processed copper, such as rocks. If you see our production of copper and the sales usually they are slightly lower, the sales in volume compared to the production volumes that we report. That's one of the reasons why you see this over time and your second question, I'm so sorry, could you repeat it, please.

Alfonso Salazar
Alfonso Salazar
Analyst at Scotiabank

Sure. Regarding selling some dam permits in Mexico, because we see that some companies are having some problems.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

Yes. No, we don't have, we haven't had any problems with that. We're currently working to have all of our all of our tailings dams not only operating with the safety that we need them to have in order to maintain our operations at a sound pace. No, nothing to report in that regard. We are basically looking into growing the capacity of these tailings dams and we are so far with no issues about this.

Alfonso Salazar
Alfonso Salazar
Analyst at Scotiabank

Excellent. Any update on the water pipeline for Buenavista.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

No, for now, it's basically as has been reported before.

Alfonso Salazar
Alfonso Salazar
Analyst at Scotiabank

Perfect. Thank you, Raul.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

You're welcome.

Operator

Thank you. One moment for our next question. It's from the line of Myles Allsop with UBS. Please proceed.

Myles Allsop
Myles Allsop
Analyst at UBS

Great. Thank you very much for taking the question. Maybe so a few quick questions to follow up. With Tía María, since your activity's been picking up over the last few months, have you seen any social unrest. Clearly, that's been an issue for many years with Tía María, Do you feel you have more acceptance by the local community at this juncture.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

Much better local acceptance to the project. Obviously, there are some people that will never change their mind. They don't like mining and they are protesting. We are seeing that the majority of the Islay population, which is, roughly speaking, a little bit more than 50,000 people live in this province of Arequipa. Of those 50,000, we don't see. We see interest in the project to move on. People is registering themselves into a website that we have opened for job offers. We're seeing a very positive development in that regard and we will obviously, we are making efforts to explain that the project will be environmentally safe for the people of Islay.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

I think it's the case with our operations in the southern part of Peru, where we have no issues regarding environmental matters with the local population of Moquegua, Tacna and Ilo.

Myles Allsop
Myles Allsop
Analyst at UBS

Then, maybe going back to that capital allocation question earlier, where does M&A fit within—obviously, organic growth is clearly the priority, There are a few opportunities in Europe and so on. At the moment, where does that M&A kind of optionality sit within the priority of management.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

The company is always open to review any opportunities that we have on the M&A, on M&A issues. At this point, we're not looking into anything specific. We are working on organic growth, If there is a good opportunity out there, our responsibility as management will be to analyze it and to report to our board of directors and ask them for a decision on that.

Myles Allsop
Myles Allsop
Analyst at UBS

Is there any really, like, tier one assets that you're interested in, like proper, big 120-plus thousand tons, or would you look at smaller opportunities as well.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

We have made both things in the past, so the answer is yes and yes. We have to look into assets that have over 100,000 tons of copper production, as long as they are a good fit with our current operations. Meaning by this, mainly copper and low cash costs. Then that can be assets of 100,000+ size or smaller assets that are close to our operations, as it has been the case with El Pilar, for instance. We have developed that deposit and it's feeding our Buenavista operations right now. It depends on certain conditions for smaller assets, it should most likely be relatively close to where we have our major operations. For bigger ones, that's a different story.

Myles Allsop
Myles Allsop
Analyst at UBS

That makes sense. Maybe the last question, just on Mexico, obviously, we've had the elections and do you think that there's the new government and the policy will impact your operations potentially in Mexico. Obviously, there has been kind of incremental challenges, shall we say, over the last six years and just on that El Pilar project as it's never really talked about because it's so small, Is that still got all the permitting, is it actually moving forward or is that still on hold. Is El Arco viable under the current administration.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

For El Pilar, we are looking into some issues regarding the recovery of the SX-EW solution. We are, we're working on that. For the other concern that you indicated on the question for the new policies of the coming government, we have to see when they present them. At this point, we have no specific issues to comment on this.

Myles Allsop
Myles Allsop
Analyst at UBS

Thank you very much.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

You're welcome.

Operator

Thank you. One moment for our next question and it's from the line of Jon Brandt with HSBC. Please proceed.

Jonathan Brandt
Jonathan Brandt
Analyst at HSBC

Hi, good morning, Raul. Thanks for taking my questions. Just two really quick ones from me. Just on Tía María, I know you're reviewing the CapEx that you have i'm more curious about the, the timing. I believe you're looking at a potential startup in the H2 of 2027. Do you see any risk that that maybe slips into, to 2028. If you could just talk a little bit about the, the timing as, as you see things and then second question is, you mentioned, the possibility of expanding the Cuajone mine.

Jonathan Brandt
Jonathan Brandt
Analyst at HSBC

I'm hoping you can give us a few more details around that and if there are any other similar type sort of smaller brownfield projects that you might have at your other mines that could help boost production in the coming years. Thank you.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

Thank you for your question, Jon. In the case of the Tía María current timeline, that's the best that we have at this point is finishing the project by the H1 of 2027, initiating the ramping up and having the project stabilized and operating at full capacity by in some time between the second and the third-

Operator

We lost your audio, sir. Ladies and gentlemen, please stand by.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

Carmen, I'm going to connect again.

Operator

Perfect. Please stand by.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

Jessica, are you. Right.

Operator

Thank you for your patience, ladies and gentlemen. Just one moment while he connects. Thank you for your patience, ladies and gentlemen. Please stand by. Ladies and gentlemen, thank you for your patience. Please continue to stand by.

Jonathan Brandt
Jonathan Brandt
Analyst at HSBC

Yes, we are.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

Carmen, can you hear me now.

Operator

We can hear you now. You can continue your presentation from this line.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

Carmen, can you listen to us now.

Operator

I can hear you. Yes, yes.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

Will the audience listen to us.

Operator

The audience is listening to you.

Operator

We still have Mr. Jon Brandt from HSBC with his question.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

Thank you very much. First, let me excuse ourselves for what just happened. Sorry about that. We'll move on with Jon Brandt question, second question. On the Cuajone expansion, the idea is to increase the capacity of the Cuajone operation by about one third of its current capacity. Nowadays, Cuajone can mill about 90,000 tons of mineral per day on the Cuajone concentrator. The idea is to build new facilities that will allow Cuajone to increase its milling capacity to 120,000 tons of material. That's basically it. As I say and let me stress, we're still working on that. We have not board approval, which is important that you keep in mind.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

I think that you already covered the other, the question about on the kind of projects that we have been looking at.

Jonathan Brandt
Jonathan Brandt
Analyst at HSBC

All right, great. Thanks, Raul.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

You're welcome.

Operator

Thank you and ladies and gentlemen, that is star one one if you do have a question. Our next question comes from the line of David Feng with CICC. Please proceed.

David Feng
David Feng
Analyst at CICC

Oh, good morning, Raul and team. This is David from CICC. Thanks for taking my question. Just one quick question on your pricing for copper. We know that the COMEX copper price tends to have some premium over LME copper price in some time this year and given that our customers are mainly based in Americas.I just wonder, shall we assume that the COMEX copper price would be a better referencing index for your copper sales instead of the LME copper price in most of your contracts.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

David, we do have most of our sales from the Mexican operations are priced using the COMEX price. For the Peruvian operations and some of the copper concentrate sales of the Mexican operations, we have to reference the LME price and for now, it looks more attractive selling on the COMEX market that could change very quickly. This year, it is, as you say, there is, there's arbitrage has been favoring the COMEX market due to the relatively scarcity that we're seeing in this in the market that prices with COMEX vis-a-vis the LME market.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

That's something that may vary over time, so we are, for that reason, having a portion of our sales in COMEX terms as well as the LME terms for some other portion of our sales.

David Feng
David Feng
Analyst at CICC

Understood. That's really helpful. Thank you so much, Raul.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

You're welcome.

Operator

Thank you. Raul, I'm not showing any further questions in the queue. I will pass it back to you for final comments.

Raul Jacob
Raul Jacob
VP of Finance, Treasurer and CFO at Southern Copper Corporation

Thank you very much, Carmen. With this, we conclude our conference call for this hour.

Operator

Ladies and gentlemen, thank you for participating in today's conference. You may now disconnect.

Executives
    • Raul Jacob
      Raul Jacob
      VP of Finance, Treasurer and CFO
Analysts
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