Good day, and welcome to Southern Copper Corporation's Second Quarter 2021 Results Conference Call. With us this morning, we have Southern Copper Corporation, Mr. Raul Jacob, Vice President, Finance, Treasurer and CFO, who will discuss the results of the company for the Q2 2021 as well as answer any questions that you may have. The information discussed on today's call may include forward looking statements regarding the company's results and prospects, which are subject to risks and uncertainties. Actual results may differ materially, and the company cautions not to place undue reliance on these forward looking statements.
Solven 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. As a result, all results are expressed in full U. S. GAAP. Now I will pass the call on to Mr.
Raul Jacobo.
Thank you very much, Carmen, good morning, everyone, and welcome to Southern Copper's Q2 2021 results conference call. At today's conference, I'm informed by Mr. Oscar Gonzalez Crocha, Cowen Copper's CEO and Board Member and Vice Minister Javier Garcia Quevedo, also a Board member. Before we go into the details of the past quarter, let me 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, sales, Operating costs, financial results, expansion projects and EUT.
After this, we will open the session for questions. Now let us focus on the copper market, the core of our business. In the Q2 of this year, the London Metal Exchange copper Price increased from an average of $2.42 per pound in the Q2 of 2020 To $4.40 that is up 81.8% increase. As As of today, we're seeing prices at about $4.50 per pound, which tops the year to date price of $4.13 per pound and both a positive outlook for the company. We believe the following factors are influencing the market: The strong demand that we're seeing in the U.
S. And Europe, particularly in terms of cattle consumption. The combined inventories of the London Metal Exchange, COMEX, Shanghai and bonded warehouses, which remained at relatively low levels, particularly given the number of days of consumption considered. The uncertainty regarding future production from Chile and Peru, which together represent about 40% of the world supply. The most important market in hedging houses for the copper market are expecting a market deficit of about 250,000 tons this year due to a recovery in demand, which should grow demand should grow between 2% to 3.5%.
Now let us look at Southern Copper's production for the Q1 2021. Copper represented 81.1 percent of our sales in the Q2 of this year. Copper production registered a decrease of 6.3% compared to the Q2 of 2020 and stood at 237,110 tons in this past quarter. This result was driven by a drop in ore grades due to stripping and maintenance work That was rescheduled in for this year after having been postponed in 2020 due to the COVID-nineteen pandemic. On a year on year basis, copper production decreased 3.9% and totaled CHF 470 5,005 tons.
For 2021, we expect to produce 960,000 tons of copper. For molybdenum, it represented 9.7 Malwisdrum prices averaged $13.89 per pound in the quarter compared to 8.24 dollars per pound in the Q2 of last year. This is a 68.6% increase. In July, the average price for molybdenum stands at $18.39 per pound, which improves our outlook for revenue generation in this Q3 and possibly for the rest of the year. Molybdenum production decreased by 10.8% in the 2nd quarter compared to the same period of 2020.
This was mainly driven by a decrease in production at both the Toquepala and Buenavista mines due to lower oil grades. These results were partially offset by higher production at La Caridad and Guajon. Silver represented 4.1% of our sales value in the Q2 of this year with an average price of $26.78 per ounce in the quarter, up 61.9 percent from the same period of 2020. Silver is currently our 2nd byproduct. Mined sugar production decreased by 16.2% in this past quarter as production fell at INSA, Buenavista and Toquepala.
And this was partially offset by a higher production at the Cuajone and La Caridad mines. Refined silver production decreased 15.3% in the 2nd quarter after production drop at La Caridad and Igloo. This was also partially offset by an increase in production activities. For zinc, we represented 2.8% of our sales value in the Q2 of this year with an average price of $1.32 per pound in the quarter, a 48.3% increase from the same period of 2020. Zinc mine production increased by 8.9% quarter on quarter and totaled 17,111 tons.
This was primarily driven by higher production at our Chartres and San Martin mines. Refined zinc production decreased by 2.8% in the Q2 of this year compared to the Q2 of 2020. For our financial results, In the Q2 of 2020, sales were $2,900,000,000 that's $1,100,000,000 higher And sales for the Q2 of last year, this is a 62.3% increase in sales. Copper sales volume decreased by 13.6%, while value increased by 59.8% in a scenario of better price. Regarding our main byproducts, we registered higher sales for molybdenum that increased 163.7 percent due to better prices, but partially offset by a decrease in volume.
Zinc Sales increased by 68% due to better prices and an increase in volume. For silver, we had an increase in sales of 21.2 percent due to better prices but partially offset by a decrease in volumes. Our total operating cost and expenses increased by $13,600,000 or 1.1 percent when compared to the same to the Q2 of 2020. The main cost increments have been in workers' participation, Fuel costs, repair materials, operating materials and supplies, operations contractors, Energy and translation difference due to the Mexican peso appreciation. These cost increments were partially offset by a decrease in inventory consumption, purchased copper and capitalized leachable material.
Our 2nd quarter 2001 adjusted EBITDA was $1862,400,000 which represented an increase of 141.9 percent With regard to the BRL 770,000,000 registered in the Q2 of last year, The adjusted EBITDA margin in the 2nd quarter was 64.3% versus 43.1% in the same period of 2020. For the 6 months of this year, the adjusted EBITDA was 3,416 $1,000,000 This is 129.5 percent higher than The EBITDA the adjusted EBITDA for the first half of twenty twenty. The adjusted EBITDA margin The 6 months of this year was 62.9%, and this compares with 42.5% for the same period of 20 20. Operating cash cost per pound of copper before by product credits was $1.61 per pound in the Q2 of this year. This is $0.101 higher than the value that we had in the Q1 of this year.
This 6.7% increase in operating cash cost It's a result of higher cost per pound from production costs, some administrative higher administrative expenses, Lower premiums for our cathodes, and this was partially offset by a decrease in treatment and refining charges. Southern Copper's operating cash cost, including the benefit of Vitalo Trade, was 0.586 cents per pound in the Q2 of this year. This cash cost was $0.154 lower Then the cash cost of $0.739 that we have per pound of copper in the Q1 of this year. Regarding by products, We have a total credit of $521,200,000 or $1.02 per ton in the second quarter of 2021. These figures represent a 33.1% increase when compared to a credit of $293,700,000 or $0.771 per pound that we had in the Q1 of this year.
Total credits have increased for molybdenum, zinc and decreased for silver and sulfuric acid. For net income, This past quarter, we had a net income of $932,700,000 which represented A 259.4 percent increase with regard to the $259,500,000 registered in the Q2 of 2020. The net income margin in the Q2 of this year was 32.2% versus 14.5 percent in the Q2 of 2020. We believe that our aggressive capital investment program, which has spent $10,600,000,000 in the last 10 years, worked alongside an improvement in market prices to drive Growth in net income this quarter. For all these investments, our company has significantly increased its production in the last decade.
For copper, for instance, we increased our production by 109%, for molybdenum by 49% and for silver by 70%. And at the same time, we improved cost efficiency and productivity. On a year over year basis, net income was 257.7 percent higher than what we had in 2010. For capital investments, Southern Copper's investment It's not based on the outlook of our copper prices, but on the quality of the assets that we operate and develop. Throughout the years, our strong financial discipline has consistently allowed us to make ongoing investments in our considerable asset portfolio.
In the Q2 of this year, we spent $219,800,000 on capital investments, which reflected a 94% increase with regard to the same period of 2020 and represented 23.6 percent of net income this quarter. In the first half of the year, we $452,400,000 on capital investment, which represented 26.7% of net income. Our current portfolio for 2 projects in Peru totals 2,800,000,000 EUR 1,600,000,000 of which has already been invested. However, if we include the up and coming Michiquillay $2,500,000,000 project and Los Chancas $2,600,000,000 project, our total investment program in Peru reflects a commitment of $7,900,000,000 Regarding the Tia Maria project in the Arequita region in Peru, Southern Copper has been consistently working to promote the welfare of the population of the life province. As part of these efforts, we have implemented Successful social programs in education, health care and productive development to improve the quality of life in the region.
We have also promoted agricultural and livestock activities in the Tambo Valley and supported growth in manufacturing, fishing and tourism in SLA. We reiterate our view that the initiation of construction activities at Tia Maria will generate significant economic opportunities for the Slaise Province and the Requipa region. Given the current Peruvian economic situation, it is crucial to move ahead on projects that will stimulate a sustainable growth We will make it a priority to hire local label to fill the 9,000 jobs that we expect to generate during the Tia Maria's construction. When operating, we expect Tia Maria to directly employ 600 workers and indirectly provide jobs for another 4,200. Additionally, from day 1 of our operations, We will generate significant contribution to revenues in the Arequipa region via royalties and taxes.
We expect the upcoming Peruvian government to acknowledge the significant progress the project has made on the social front and the important contributions that Tia Maria will generate for Peru's economy and consequently take the necessary steps to provide SEC with adequate support to initiate construction. For the Buenavista zinc for the Mexican projects, let me start by the Buenavista zinc Concentrator, which is in the Sonora state. This project is located within the Buenavista facility and includes the development of a new concentrator To produce approximately 100,000 tons of zinc and 20,000 tons of copper per year. We have completed the basic engineering study and the detailed engineering study is 94% complete. In order to continue with the project, Stronger preventive measures to combat COVID-nineteen has been put in place.
Procurement has progressed 84%. Additionally, construction site works are in progress. The project has all the necessary permits and the capital budget is $413,000,000 As of June 30 this year, we have invested $178,200,000 in this project. We expect to initiate operations in 2023. When completed, this new facility will double the company's zinc production capacity and provide 4 90 direct jobs and 1470 indirect jobs.
For the Pilares project also located in Sonora, this is a project that is 6 kilometers away from La Caridad. This project consists of an open pit mine operation with an annual production capacity of 35,000 tons of copper in concentrate. A new 25 meter wipe off road facility for mining trucks has been built and will be used to transport the ore from the pit to the primary crushers at the La Caridad copper concentrator. This project will significantly improve the overall mineral oil grade, Combining the 0.78 percent expected order grade from Pilares with the 0.34% the current ore grade from La Caridad. The project for Pilares is $159,000,000 and we expect the project to begin production in the Q1 of 2022.
As of June of this year, we have invested $75,300,000 in this project. El Pilar is a loan capital intensity copper greenfield project, which is strategically located in Sonora, Mexico. It is about 45 kilometers away from our Buena Vista mine. Its copper oxide mineralization contains Estimated proven and probable reserve of 281,000,000 tons of ore with an average copper grade of 0.3 1%. Let me comment that this ore grade is an excellent one for oxides, which is the We anticipate that the Pilar We operate as a conventional open pit mine with an annual production capacity of 36,000 tons of copper catheters.
This operation will use highly cost efficient and environmentally friendly SX EW technology. The budget for Epirilar is $310,000,000 As of June 30, we have invested $2,000,000 in this project. We expect production to begin in 2023 and the mine life is estimated at 13 years. The results from experimental tests in the leaching process have confirmed adequate levels of copper recovery. The company continues developing the project basic engineering and site environmental activities.
For our world class copper deposit, El Arco, which is in the Baja California state, We have historically located at the Central Park of the Baja California Peninsula with ore reserve of over 2,400,000,000 tons and An ore grade of 0.4% to 2 percent and 0.11 grams of gold per ton. The project includes an open pit mine combining concentrator and SX EW operations. Annual production is expected to total 190 1,000 tons of copper and 105,000 ounces of gold with an estimated capital budget of $2,900,000,000 As of June 30 this year, we have invested $63,600,000 in this project. The company has started the baseline study and is reviewing the basic engineering analysis to request environmental impact permit. Several years back, we began to acquire the rights to all relevant mining concessions in the area.
This process was completed in 2020. Southern Copper is committed to improving its ESG record by adopting best practices and communicating to the investment community and other stakeholders our progress in these matters. Southern Peru, Our Peruvian branch signed an institutional cooperation agreement with the Ministry of Health of Peru that allows the company to support the government in efforts To organize and implement 26 vaccination sites in the regions of Arequipa, Moqueba, The company will donate more than USD 2,400,000 to vaccinate 424,000 plus people over the next 2 months, which is equivalent to 40% of the population in these regions. The aforementioned agreement was the 3rd of 3 agreements signed with the government of Presidio Enceladasim to aggressively fight the pandemic. The first entailed a donation of 2,181 tons of medical oxygen, which was produced by the oxygen plants at our Ilha smelter to provide liquid oxygen to the southern regions of Peru.
The 2nd donated 4 oxygen plants to OFM Mobile, which are currently operating in the regions of TACNA, Pono, Arequipa, Our company is committed to sorting our operations with renewable energy. In 2020, 22% of Southern Copper Corporation electricity came from renewable sources. We're currently evaluating options to contract additional an additional portion of our power demand on renewable electricity. In 2022, we expect at least 25% of our energy supply will come from renewable The percentage of recycled water from mining operations has increased 5% Over the last 3 years, reached 74%. By this, I mean 5 percentage points, So from 69% to 74%.
This represented savings of approximately 3.5 1,000,000 cubic meters of fresh water a year. The company has made major efforts to increase the amount of water Available to nearby communities in Mexico and Peru, has rehabilitated more than 200 kilometers of irrigation canals and 400 water reservoirs. These initiatives have benefited 20,000 farmers. And in just 5 years, the company has invested $79,000,000 in water projects for communities. Recently, Grupo Mexico published its sustainable development report for the year 2020.
It contains information on Southern Copper Corporation's progress in areas relative to sustainability and is aligned with the reporting standards of the Global Reporting Initiatives and for the first time also peers to the framework of the Sustainability Accounting Standard Board and the task 4 on climate related financial disclosure. The 2020 version includes a section on the SEC's response to the COVID-nineteen pandemic and provides greater detail on issues relative to economic, Governance and Climate Change Performance. Regarding dividends, As you know, it is the company's policy to review our cash position, expected cash flow generation from operations, capital investment plans and all our financial needs at each Board meeting to determine the appropriate quarterly dividend. Accordingly, As announced to the market on July 22, the Board of Directors authorized a cash dividend of $0.90 per share of common stock payable on August 26 to shareholders of record at the close of business on August 12 this year. So with this in mind, ladies and gentlemen, thank you very much for joining us, and we would like now to open up the phone for questions.
We have a question from the line of Thiago Lofiego with Bradesco BBI. Your line is open.
Thank you. Good morning. Good afternoon, everyone. Two quick questions. About the lower ore grades, Could you give us an update on how that should evolve in the second half of the year?
We understand that this is mostly related to maintenance that you didn't do last year And you're doing now, so just want to understand if there is more impact of Lloyd's oil grades in the second half. And the second one about dividends. So you just mentioned you will continue to evaluate The dividend policy. The truth of the matter here is that copper prices remain quite high And the outlook seems to be pretty positive. So what could we expect on the dividend side, maybe On the buyback side as well, could we see an increased payout?
The average payout for the last couple of years have been around 75% ish. Could we see 100 percent payout, especially considering delays in big projects like Tia Maria?
Thank you for your question, Thiago. Well, for the second half of the year, as we explained Today, as we have reported before, in 2020, we couldn't make all the maintenance work and Stripping that was required at our operations. We're doing a catch up on that. And as a consequence, You go into certain areas of the mines where ore grades are not as good That's what you have to say so in the main part of the ore body. That's why our ore grades are lower now.
We expect this to improve as we going to better parts of the different operations. But we have I indicated before that at least in the case of the Peruvian operations, we will pass a patch of lower Seeing a better performance at what we initially believe. At the beginning of this year, we mentioned that our Production for 5 was expecting we were expecting to produce 943,000 tons of copper. Now we have adjusted that upward to 960,000 tons of copper. And that's So that there is an improvement to our initial forecast.
We expect to produce a little bit more And that but for now, that's our current goal. Now regarding dividends, well, This is a company that this is a decision that is always up to the Board. But as if you see our track record, this is a company That has not hoard cash. Our board, in general, Has been keen on sending any excess cash to our shareholders. So If there is a delay in projects or if there is a much better or a better Outlook for metal prices, I think that they will make a decision.
But if you look at their track record, You can get your own conclusions on that. We are not expecting to have any buybacks for now.
Okay. Very clear, Raul. Thank you so much.
You're welcome, Thiago.
Our next question comes from James PSB at Morgan Stanley, your line is open.
Yes. Thank you. Raul, just wanted to ask, Could you also provide an update of the guidance for the other metals if those were affected? And also if this new copper production guidance Okay. Thank you for your question, Jens.
Let's hold on a sec, please. Okay. I mentioned already that for copper, our guidance is 960,000 tons For molybdenum, 20,300 tons 28,300 tons For zinc, 72,800 tons for silver, 20,600,000 ounces. And You mentioned already the cash cost guidance? Exactly, the cash cost guidance.
Is that changed versus What you have mentioned before before byproducts? Well, what we're seeing is that Before byproducts, we're expecting a relatively lower total cash cost Than what we had in line at the beginning of the year. We're currently expecting $1.61 per pound And a cash cost of about $0.65 for the year. And the reason for the better outlook that for what we at the beginning of the year, we mentioned About $0.85 per pound. And the reason mainly it's related to the much better Prices that we're seeing for our byproducts.
Cost, as you have seen, has increased, but we Managed to contain it due to favorable variances in related to purchase of copper purchases, Inventory movements and capitalized leachable material. So We believe that we will have cash cost in that range. Obviously, as we move on into a much Inflationary environment, we may see an increase in the cash cost before Like product credits, but we also believe that, that will be reflected somehow in the prices of our back products as well. Okay. Thank you.
You're welcome.
Our next question comes from Klans Spohr with Bloomberg
Hi, good afternoon and thank you for taking my questions. I've just got one question, if I may, And that's on Tia Maria. Could you just outline what you need in terms of permits? And what are the milestones you need to achieve before you fully go ahead with the Tia Maria project? Thanks very
much. You're welcome, Grant. We don't have any other needs for Permits. We have all the permits that are required to initiate the construction of the project. What we have indicated is that we require a better social environment for the project to begin.
Now Let me say that we have made a very significant progress on the project social environment. And at this point, we believe that if we work with the national government, the regional authorities as well as the local ones, We will be able to move on with the construction. Now for that, we need to see the How the new Peruvian government will consider this project and on that matter, we're certainly We're willing to cooperate with the new administration to move on with the project as soon as we can.
Yes. Okay. Thanks very much. I guess as an analyst, you're sort of looking for Hard yes or no. But I guess in this instance, it's a little bit more you have to gauge the environment, I'm guessing, but thank you.
Thank you for your answer.
You're welcome.
Our next question comes
Carmen, we listened to you Relatively lower, relatively low.
Okay. I'm sorry. Let me get my volume. Our next question is from Tim Lambert with Alumis Sales.
Hello. Thank you for taking my question. Just one question on CapEx for me. Has there been any revision to the guidance for CapEx this year? It looks like at least first half of the year is on the lower end compared to what we're expecting for the full year.
Was it always expected to be back weighted? Just any color there would be great.
Sure. Well, we have made a review in our CapEx, but not significantly. It hasn't changed Significantly, about $15,000,000 it's the change in small CapEx. And the reason for that is that We're basically coming back from a year last year when we couldn't make as much as we want to, and we are Somehow catching up on what we couldn't do last year. So our current guidance is, as I said, About $15,000,000 lower than the initial one for this year.
Okay. So that was about, What, dollars 1,380,000,000 or so?
For now, Currently, it's $1,340,000,000
Our next question comes from John Tumazos with John Tumazos Very Independent Research.
Thank you very much. Could you just walk us through the project completion schedule for 2022 and 3, if any of the dates have been pushed back with virus and Other challenges. And should we interpret for Michiquia and Los Chancas And Alarco, that they're far enough away that there's no firm date.
Well, the answer to the second part of your question is no. We do have A goal for finishing both Los Chancas and Michiquillay. And I'll give you an update on all the projects now. For well, for Pilares, I mentioned that we are expecting to initiate production next year at the Q1. For the Buenavista zinc concentrator, we're expecting to initiate productions by mid-twenty 23.
El Pilar should be up and running by 2023. That's our current goal. For Tia Maria, we're expecting to initiate production by 2024. Los Chancas by 2,000 I'm sorry, 2027 And Michiquillay by 2028.
And El Arco?
Sorry about that. The ARPU is scheduled for 20 28 as well. Thank you.
If I can ask one more. We're trying to interpret politics in Peru. And here in America in 20 2016 2020, many of us didn't like either presidential candidate and it was more of a tough Choice than embracing a mandate. Do you think in Peru, There was strong support for either candidate or a little bit like which one was Less unpopular. And do you think the legislature Is majority left or majority right or partly undecided?
On the election, the polls before getting into the 2nd round of the Peruvian election process show that both candidates that passed to the runoff We had relatively much lower support than the usual for Peruvian politics. Now regarding our Congress, I think that You have 3 main groups, and they have been The usual, the right, the left and some parties at the center. Yesterday, we had the election of the President of Congress, and it was the lady that was selected. It's a center It's a member of 1 of the center parties, and she ran a coalition that was the one that won that election.
Thank you very much.
You're welcome.
Thank you. Our next question comes from Andreas Oppenhauser with UBS. Your line is open.
Thank you very much. Just a follow-up question on costs. I remember last
Andreas, I can't copy you well.
Is this better?
Much better.
Yes, sorry about that. Yes, a question on cost, a follow-up question on cost. So I remember last year, you were kind of talking about a bit of cost inflation and for cost to effectively normalize. We obviously saw cost coming down quite significantly 2Q, which was nice to see. But what were you thinking in terms of your normalized cost levels per pound in 2020 year 2?
Well, for next year, We should have a relatively higher cash comp than what we had in this year. Particularly before taking the byproduct first. And the reason for that is that We are having a relatively lower ore grade at the Peruvian operations for next year, which will impact on the cash cost. We are expecting probably $0.10 more than what we have now for cash cost before by total credit for 2022. Now having said that, this is a figure that is under constant review, And we will be updating it as we move on through this the remaining part of 2021.
That's very clear. Thank you very much for that clarity.
You're welcome, Ambras.
Thank you. We have a question from Alejandra Amjad with JPMorgan. Your line is open.
Thank you so
much for taking my question. I just had a quick one on actual Liability Management, I know you only have very little debt coming due in 'twenty two, 'twenty five, but I was thinking of how you were thinking about that debt, if you were looking to Finance in the short term, so we could see LME for the 25? Thank you so much.
Yes. Thank you for your question, Alejandra. Well, the straight answer to your question is that no, we're not considering At this point, any specific liability management. We have to look into the matter. We always do I mean, it's an ongoing task.
But for now, we believe that we will remain with the structure that we have. As you know, we have a relatively relaxed payment schedule. Next year, we have to pay $300,000,000 And then in 2025, another $500,000,000 You see our cash position. We're very comfortable With that and the other the remaining part of our debt portfolio, it's relatively far away in terms of its maturities and at very high prices. So after a review, an internal review in the matter, we decided But for now, we are not looking into this matter.
Now if we let's say that if we go on with One of our projects we may consider one of our big projects, say, Tia Maria, we may consider Tapping the market, but that is something that will be discussed when appropriate.
Great. Thanks. And just to clarify then, so for the 2022, you would be looking to pay that with cash instead of issuing a new bond?
For the yes, that's correct.
Thank you so much. Appreciate it.
But again, we're always looking into this matter. And if conditions are considered to be appropriate ones at that time, we may review what I just said.
Great. Thank you so much.
You're welcome.
And thank you, sir. I'm not showing any further questions
Yes. Thank you very much, Carmen. And well, with this, we conclude our conference call for Southern Copper's 2nd quarter of 2020 results. We certainly appreciate your participation and hope to have you back with us when we report the Q4 of this year. Thank you very much, and have a nice day.
Thank you. And this concludes our conference for today. Thank you for your participation and you may now disconnect.