THOMSON REUTERS STREETEVENTS EDITED TRANSCRIPT SCCO - Q Southern Copper Corp Earnings Call EVENT DATE/TIME: OCTOBER 29, 2014 / 04:00PM GMT

Transcription

1 THOMSON REUTERS STREETEVENTS EDITED TRANSCRIPT SCCO - Q Southern Copper Corp Earnings Call EVENT DATE/TIME: OCTOBER 29, 2014 / 04:00PM GMT 1

2 CORPORATE PARTICIPANTS Raul Jacob Southern Copper Corporation - CFO Oscar Gonzalez Rocha Southern Copper Corporation - CEO Daniel Muñiz Grupo Mexico - CFO CONFERENCE CALL PARTICIPANTS Santiago Perez Teuffer Credit Suisse - Analyst Thiago Lofiego BofA Merrill Lynch - Analyst Carlos de Alba Morgan Stanley - Analyst Wilfredo Ortiz Deutsche Bank - Analyst Andre Pinheiro Itau BBA - Analyst Marcelo Aguiar Goldman Sachs - Analyst Mitesh Thakkar FBR Capital Management - Analyst Mandeep Singh JP Morgan - Analyst Alfonso Salazar Scotiabank - Analyst Sasha Bukacheva BMO Capital Markets - Analyst Alex Hacking Citi - Analyst Marlene Finny Grupo Bursatil Mexicano - Analyst Marcos Assumpcao Itau BBA - Analyst Andreas Bokkenheuser UBS - Analyst Leonardo Correa BTG Pactual - Analyst PRESENTATION Welcome to the Southern Copper Corporation third quarter 2014 earnings results conference call. My name is Richard, and I will be our operator for today's call. ( Instructions) Please note that this conference is being recorded. I will now turn the call over to Mr. Raul Jacob. Mr. Jacob, you may begin. Thank you very much, Richard. Good morning everyone and welcome to Southern Copper's third quarter 2014 earnings conference call. Participating with me in today's conference are Mr. Oscar Gonzalez Rocha, Southern Copper's CEO, and Mr. Daniel Muñiz, Grupo Mexico CFO and Southern Copper's Board member. In today's call we will begin with an update on our view on the copper market. We will then talk about Southern Copper's key results related to production, sales, operating costs, financial results, expansion projects and capital expenditure programs. After that, we will open the session for questions. Regarding the copper market, we maintain our view of this market for We see relative softness in copper prices during the rest of 2014 and next year, however we do believe that prices at the current level are not sufficient to promote the necessary future supply growth, thereby improving the strong long-term fundamentals of our industry. As we have indicated in the past, we believe short-term copper demand is consistently improving due, in large part, to the economic recovery of the US, some of the major European economies, Japan and China. On the supply side, we think that several structural factors, such as scrap scarcity, delays in project startups, technical problems, labor unrest, and other difficulties, will continue to affect supply from new projects and existing operations, as well as scrap production. As a consequence of these factors, we think that instead of a market 2

3 with a surplus between 300,000 and 400,000 tons of copper, the conventional wisdom at the beginning of the year, we are looking now to a balanced market, or one with a small deficit, in Looking into Southern Copper's copper production, it represented 80% of our sales in the third quarter of Our mine production increased by 9,475 tons, or 6.1% in the third quarter, compared to the same period of This was due to higher production at our La Caridad and Buenavista operations. On August 6th of this year, an accidental spill of approximately 40,000 cubic meters of copper sulfate solution occurred at a leaching pond that was under construction and located 10 kilometers away from the Buenavista mine. The accident was caused by a rock collapse that affected the system's pumping station and by a construction defect in the seal of a pipe in the leaching system containing them, a part of the new SXEW III plant. This solution reached the Bacanuchi River, a branch of the Sonora River. We commissioned more than 1,210 people to attend the local community's work on the cleanup of about 250 kilometers of the Bacanuchi and Sonora River beds, which has been successfully completed. We established a 2 billion peso, which is approximately $150 million, as a trust fund to support remedial actions and provide compensation for those affected by this accident. A technical committee was created to manage the funds, comprised of representatives from the federal government, the company, and specialists assisted by a team of environmental experts. The authorities have determined that all the wells for agriculture and domestic use that were preventively closed can be reopened because the official water test results comply with all applicable norms and regulations. Even though our Toquepala, Cuajone and La Caridad operation units are obtaining better production results than our 2014 plan, this unfortunate event will reduce our Buenavista production for the year. We now expect to produce and sell 658,000 tons of copper, of our own copper in 2014, instead of the initial guidance that we had for this year of 672,000 tons. Regarding molybdenum, it represented 8% of our sales in the third quarter of Molybdenum production increased by 1,278 tons, or 27%, in the third quarter when compared to the same period of last year, mainly as a result of the Toquepala operation that provided 740 tons of those mentioned, that's a 65% increase; Buenavista, 321 tons, which is a 300% increase in molybdenum production at this unit; and Cuajone, 192 tons or 22%. For 2014 we are increasing our molybdenum guidance to produce 23,400 tons of molybdenum, 18% more than our 2013 production. In this case we are increasing our guidance from 21,500 tons that was our initial plan, to the mentioned 23,400 tons of molybdenum production. Regarding silver, it represented 4.9% of our sales in the third quarter of Comparing the last quarter silver mine production with the third quarter of 2013, there is a decrease of 12% as a result of lower production at the IMMSA operations of Santa Eulalia that has been affected by a flood, and Charcas, which had a technical problem that has been already solved. Buenavista production also decreased by 10% and Toquepala by 6%. Higher production at La Caridad, plus 12%, and Cuajone, plus 5%, partially offset these results. Regarding zinc, it represented 2.8% of our sales in the third quarter of Zinc production has decreased 47% in the third quarter of 2014 when compared to the same period of last year, mainly as a result of lower production at the Charcas and Santa Eulalia mines. Focusing on financial results, for the third quarter of 2014, net sales were $1.5 billion, $90 million higher than the net sales of the third quarter of Copper sales value increased by 6.7% due to higher volume, that was 9.2% higher in volume, and copper price that decreased by 1.2% following the London Metal Exchange quotes. Regarding by-products, we had higher sales of molybdenum, plus 52.6%, due to an increase in volume of 27.5% and a price increase of 34.8%. Zinc sales decreased by 13.2%. Our operating costs and expenses increased by $126.6 million, or 15.8% when compared to the third quarter of The main cost increments include the environmental reclamation charge of $37.2 million that is related to the accidental spill; higher inventory consumption, higher sales expenses and depreciation, plus some additional cost in fuel and power. These and other cost increases were offset by lower purchased copper and exchange rate depreciation. Our EBITDA for the third quarter was $675.7 million that is a 45.8% margin, and compares with $686.8 million, a 49.6% margin for the third quarter of last year. Regarding cash cost. Our operating cash cost per pound of copper, before byproduct credits, was $1.96 per pound in the third quarter of this year. That figure compares with $1.97 per pound in the second quarter of 2014, which is about a $0.016 decrease. This decrease in operating cash cost is the result of lower cost per pound due to capitalized leachable material, higher premiums, which compensated for higher cost per pound from treatment and refining charges, administrative costs and the already mentioned production cost variances. Southern Copper's operating cash cost, including the benefit of by-product credits, was $1.14 per pound in the third quarter of Regarding by-products, we had a total credit of $287 million, or $0.82 per pound in the third quarter of This amount compares with a credit of $364 million, or $1.03 per pound in the second 3

4 quarter of this same year, Total credits have decreased for our most important by-products: in the case of molybdenum by 33.2%; the case of zinc by 20.4%; sulfuric acid by 10.2%; and silver by 3%. Net income attributable to Southern Copper shareholders in the third quarter of 2014 was $324.3 million, or 22% of sales. That is $0.39 of diluted earnings per share. Looking at our expansion and capital projects. Capital expenditures were $411.6 million in the third quarter of this year, 9.6% higher than our CapEx expenses in the second quarter, and represented 127% of net income. For the nine months of 2014, CapEx were $1.1 billion, which in addition to the approximately $600 million already committed, will allow us to reach 74% of our budget of $2.3 billion for the year. We continue moving forward with our capital expansion program, which aims to increase copper production capacity by approximately 87% from its 2013 level, to 1.2 million tons by Looking at the Buenavista projects, we continue developing this $3.4 billion investment program and we expect to increase production capacity at Buenavista by 175%, and molybdenum production by 42%. Regarding the mine expansion, to date we have received ton capacity trucks, 7 shovels and 8 drills required for the mine expansion. That comprises an investment of $510.8 million. All of this equipment is currently assembled and in operation. The new copper molybdenum concentrator has an annual production capacity of 188,000 tons of copper and 2,600 tons of molybdenum. The project will additionally produce 2.3 million ounces of silver, and 21,000 ounces of gold per year. This project has a progress of 86.4%, with an investment of $882.6 million that is out of the approved budget of $1,383.6 million. The project is expected to be completed in the third quarter of 2015, and all the major equipment is already onsite and has been installed. Regarding the SXEW III plant, we continue to ramp up production since the first copper cathode was produced last June. All three solvent extraction trains are in operation, and we recently initiated operation of the second half of our electro winning plant. Estimated annual production for the plant is 120,000 tons of copper cathodes. That's refined copper. We expect to reach full capacity by the end of the fourth quarter, this quarter. The capital budget of $444 million has been invested. Focusing on our Peruvian projects, and in this case on the Toquepala unit, through September 30 of this year we have invested a total of $324.9 million in Toquepala projects. On September 25 of this year we answered the questions and comments received from authorities and other stakeholders related to the Environmental Impact Assessment (EIA) of the Toquepala concentrator expansion. We expect to receive the government approval of the EIA study in the last quarter of the year, which will allow us to continue developing this important project. The Toquepala concentrator expansion will increase annual production capacity by 100,000 tons of copper and 3,100 tons of molybdenum at a total capital cost of approximately $1.2 billion. Cuajone projects. Through September 30 of this year, we have invested and committed $39.2 million of a budget of $45 million on the High Pressure Grinding Rolls (HPGR) project, which will produce a more finely crushed material. This project continues in the ramping up stage, and we expect to reach full capacity during this quarter. The project is expected to generate cost savings, improve copper recovery, and reduce power consumption in the crushing process. Through September of this year implementation of the HPGR project and the variable cut-off ore grade project implemented last year, in 2013, have produced an estimated incremental production of 18,000 tons of copper. The project to improve slope stability at the south area of the Cuajone mine will remove approximately 148 million tons of waste material. This project will improve mine design without reducing current production level. The mine equipment acquired includes one shovel, five 400-ton capacity trucks, one drill and auxiliary equipment which will be reallocated to our other mine operations once the project is finished. Besides preparing the mine for the future, this investment will avoid a reduction in average ore grade. As of September of this year, 7 million tons of waste material have been removed and activities will continue for another 4.5 additional years. We have invested already $67 million in this project. Regarding Tia Maria, on August 1st of the year we received the final approval of our Environmental Impact Assessment. We expect to be granted the authorization to move forward with the construction phase before the end of the year, and begin construction in the first quarter of The project will represent an investment of approximately $1.4 billion to produce 120,000 tons of copper cathodes per year, using state of the art technology with the highest international environmental standards. The project is currently expected to generate 3,500 jobs during the construction phase. When in operation, that is on the first quarter of 2017, Tia Maria will directly employ 600 workers and indirectly another 2,000. Through its expected 20 years of life, the project related services will create significant business opportunities in the Arequipa region. In addition, the Company intends to implement social responsibility programs in this region similar to those established in the communities near its other Peruvian operations. Regarding dividends, as you know it is the company's policy to review at each board meeting cash resources and expected future cash flow generation from operations, capital investment plans and other financial needs in order to determine the appropriate quarterly dividend. Accordingly, as disclosed to the market on October 23rd this 4

5 year, the board of directors authorized a cash dividend of $0.12 per share of common stock payable on November 25 to shareholders of record at the close of business on November 11. With this in mind ladies and gentlemen, thank you very much for joining us, and we will like to open up the forum for questions. QUESTION AND ANSWER Thank you. We will now begin the question and answer session. ( Instructions) Santiago Perez Teuffer, Credit Suisse. Please go ahead. Santiago Perez Teuffer - Credit Suisse - Analyst Thank you. Hi Raul, Oscar and Daniel, thanks a lot for taking our questions. I have a couple of questions if I may. The first one is related to the cash impact of the trust fund of the Buenavista spill. How much of the $37 million have been spent now and how much do you estimate that it will be in total? And how much was it actually cash impact for Southern Copper? Okay. Of the $37 million, at the end of September, at the closing of the quarter, we had $5.5 million that were spent already. And as of the first half of October, an equivalent of $13.9 million were spent, which includes the $5.5 million that I just mentioned. Santiago Perez Teuffer - Credit Suisse - Analyst Perfect. And then, Raul, as a follow-up, did the spill affect the concentrator project, in terms of profitability? And also could you give us some color as to how much copper production are you estimating for 2015 and 2016 with these delays and the little bit of delays in Toquepala? Thank you. Yes. Okay, on the production, we're expecting to produce, as I mentioned, for 2014, 658,000 tons. For next year we're adjusting our guidance. Previously we indicated that we will be producing 840,000 tons. We are reducing that to 758,000 tons for next year. Now let me emphasize that this number is still under review. We may have, I believe, a better plan when we start And Santiago, I forgot, your other point was?-- Santiago Perez Teuffer - Credit Suisse - Analyst Did the spill affect at all the concentrator project? More in profitability terms than in time. No, there is no impact. Other than the time lag that we just mentioned, the concentrator, which is a facility that is being built in a different area of the concession that we have Mexico, it's not being affected by this event. Santiago Perez Teuffer - Credit Suisse - Analyst Great. Thanks. And just one more. Can you comment on your buyback strategy? Is there any buyback yield that you're aiming to reach? And are there possibilities that you could cancel the shares that you bought during the year? 5

6 Well actually due to its nature, we cannot comment on the strategy of our buyback program. Santiago Perez Teuffer - Credit Suisse - Analyst Okay, thanks, Raul. Thiago Lofiego, Merrill Lynch. Thiago Lofiego - BofA Merrill Lynch - Analyst Thank you, guys. I have a couple of questions. The first one on the Tia Maria and Toquepala projects, and the related timing of approvals. Is there any chance we see approvals delaying, meaning that we could only see those approvals coming in next year? So just wanted to understand what the risks here are. And also what's the timing difference once you get the permissions between Toquepala and Tia Maria? The second question is regarding the CapEx for these projects. Do you see any chance of upward revisions or should we pretty much work with the numbers you've been mentioning? And if you could confirm those numbers, that would be great. Thank you. Okay, the first question is then if we see any possibility of a delay in the Toquepala and Tia Maria. And the second question Thiago Lofiego - BofA Merrill Lynch - Analyst On approvals, yes. is on the CapEx budgets for these projects. I'll ask Mr. Oscar Gonzalez to answer it. Oscar Gonzalez Rocha - Southern Copper Corporation - CEO Yes, in Tia Maria and Toquepala. Tia Maria we already have the approval of the environmental impact study. We are presenting the approval for the construction. And we plan to start at the beginning of next year the construction if everything goes right. We don't foresee any delay. On Toquepala, we are waiting to get by the middle of the month of November the approval of the environmental impact study. And if everything goes right, we will have the construction license approval faster because we already are working at Toquepala and it's not a new project. We plan also to start at the same time, at the beginning of the year, the construction of the Toquepala project and start requesting the purchase orders for the main equipment. We don't foresee any change in the CapEx. The CapEx that we have for Tia Maria is around $1.4 billion, and in Toquepala, $1.2 billion. That is a total of $2.6 billion investment for the following years of 2015 and We plan to start both projects at the beginning of Thiago Lofiego - BofA Merrill Lynch - Analyst 6

7 Could you just confirm how much you've already spent with the Tia Maria project, Raul? About $350 million has been spent already in Tia Maria. Thiago Lofiego - BofA Merrill Lynch - Analyst Okay. Oscar Gonzalez Rocha - Southern Copper Corporation - CEO That is mainlyinvested in all the crushing and conveyor system because you remember that we sold the leaching plant to the Buenavista project, and we are going to need to buy another plant for this project. Thiago Lofiego - BofA Merrill Lynch - Analyst And on Toquepala, same question, have you already spent anything on Toquepala? Oscar Gonzalez Rocha - Southern Copper Corporation - CEO We have mainly invested in technological improvements that we are doing in order to substitute the railroad for a conveyor system that will be good for the expansion of the mine. In this manner, we are going to be able to transport all the 120,000 tons through that conveyor and through that crushing building helping the two crushing plants or crushing equipment in order to do both, the old and the new expansion for 120,000 tons of milling capacity. Let me add to that, Thiago, that we have spent already $325 million in projects that are not exactly for the expansion, but related to improve the company's efficiency and cost as indicated by Mr. Gonzalez in the Toquepala operation. We spent $325 million for these purposes. Thiago Lofiego - BofA Merrill Lynch - Analyst Okay. That's clear. Thank you, Mr. Gonzalez, thank you Raul. Carlos de Alba, Morgan Stanley. Please go ahead. Carlos de Alba - Morgan Stanley - Analyst Yes, good morning and thank you. Do you have any updated guidance for production in post 2015? And also any changes in CapEx since the last call? And finally, how do you see the evolution of the cash cost, the overall cash cost of the four by-products during the coming quarters? Okay, Carlos. Well let me focus first on copper. And, for the benefit of our audience, I will repeat our guidance for 2014 and future years. For 2014 our new guidance is 658,000 tons; for 2015, 758,000 tons; for 2016, 912,000 tons; 2017, million tons; and for 2018, 1,199,000 tons. That's for copper production. 7

8 On CapEx, we indicated that to the current capital expenses already made of $1.1 billion, we will add about $600 million in the fourth quarter that will let us finish the year with $1.7 billion in capital expenditures for Now that changes a little bit our forecast for the next years. For 2015, we're expecting to spend $2 billion; for 2016, 1.4 billion; for 2017, $1.2 billion; and for 2018, $600 million. These figures include about $400 million of maintenance capital. COMPANY NOTE: To clarify, the aforementioned CapEx forecast considers some projects which have not yet been approved by our Board. Excluding them CapEx guidance is: $1.6 billion for 2014, $1.8 billion for 2015, $1.1 billion for 2016, $1.0 billion for 2017 and $450 million for Carlos de Alba - Morgan Stanley - Analyst Okay. Perfect. Thank you very much, Raul. Any comments on cost, on cash cost before by-products in the coming quarters? Yes. Well in the third quarter we had, at the end of the quarter, a significant reduction in molybdenum prices. Molybdenum is currently our main byproduct, with silver. In the case of molybdenum, we are expecting prices to be at about $10 for the rest of the year. That is impacting the credits that we're getting. As I mentioned, we are decreasing our estimate, or actually our specific credits for the quarter. I believe that this is going to affect us for the remaining of However, as we move on with the ramping up of the SXEW III plant, we should be getting much more copper production on a copper that has a very competitive cash cost-- additional copper with very low cash cost. So we think that our cash cost before credits will trend to decline in the fourth quarter. But the credits will be more or less on a per pound basis where they are, or even smaller, due to the reduction in by-product prices. Carlos de Alba - Morgan Stanley - Analyst Okay. Thank you, Raul. Wilfredo Ortiz, Deutsche Bank. Please go ahead. Wilfredo Ortiz - Deutsche Bank - Analyst Yes, good morning everyone. Just wanted to check in on the income. On the income statement you had a $37 million environmental charge. Is that pertaining to the spill, and is that going to be ongoing as part of the $150 million? And is that also part of the reason why the unit cash costs were also higher on a sequential basis? Just wanted to get a little bit more clarity on that line item. Okay. Let me start by the end of your question, Wilfredo. This is not included in our cash cost. Certainly it has influenced our cost. We had some impact on total operating cost due to the spill. But specifically speaking on the trust fund, the $37 million, as I indicated at the beginning of the call, a portion of that has been already used, about $14 million, for environmental claims. And for the future, we'll see what other expenses related to this unfortunate event require the company to fund some remediation. And when we believe that this is already finished, we will stop with the funding of the $150 million trust. So the $150 million dollars, is a number that is a reference, it's an estimate that we will see how much of that will be used. Wilfredo Ortiz - Deutsche Bank - Analyst 8

9 Thank you. Daniel Muñiz - Grupo Mexico - CFO I think, Raul, just for the sake of completeness, it is worth mentioning that we've completed all the cleanup of the river so far, that all the wells are open, and I mean that's for human consumption and agricultural. So we ve made a lot of progress. Andre Pinheiro, Itau BBA. Please go ahead. Andre Pinheiro - Itau BBA - Analyst I have two quick questions. Good afternoon everyone. The first, given that SCCO will reduce its target for next year, and will likely produce less copper, and we're seeing that in the industry in general, do you think that we could see some upside to prices in 2015, the same thing we've seen at least this year? For example, the market could be a bit more balanced, and we could see prices even going up. That would be my first question. Well generally speaking, we don't comment on where the prices are going to be. We focus on production. We focus on managing our operations in the most efficient way. And if copper prices are better, we will certainly appreciate the extra cash flow from our operations. But other than that, I'm sorry that we can't comment on that, on the prices. Just what we're seeing is that at this price level several projects that should be moving forward are not. And this is something that improves the fundamentals, long-term speaking, for our company. Andre Pinheiro - Itau BBA - Analyst Okay, great. That's very clear. No problem. And regarding costs in 2015, I mean we were talking about this short-term, but I couldn't really hear you on the call. In 2015, should we see cash cost before by-products declining as well? Yes. That is something that we're expecting. On our expectation about cash cost for next year, we will address this matter on the conference call for the closing of 2014, that is in January of next year. Andre Pinheiro - Itau BBA - Analyst Okay. And just to confirm Let me emphasize that we do expect a much better cash cost in 2015 for the following. We will have the SXEW III plant at Buenavista running at full capacity. That is a low cost facility that we expect will improve our cash cost. Also we will have at the end of the year the new Buenavista concentrator running, or initiating its ramping up. This will increase our additional copper production, with copper that is very competitive cost wise. We expect these factors to impact very positively our cash cost. Andre Pinheiro - Itau BBA - Analyst 9

10 Okay, perfect, Raul. And just one final confirmation here. Regarding your production guidance for 2016 that was the only number that I didn't hear. If you can repeat that please is 912,000 tons. Andre Pinheiro - Itau BBA - Analyst Okay, perfect. Thank you very much. Marcelo Aguiar, Goldman Sachs. Please go ahead. Marcelo Aguiar - Goldman Sachs - Analyst Yes, hi. Thank you everyone. Good afternoon. So Raul, just can I get a view how you're seeing Buenavista production? I mean you guys have cut like around 20% production I think until the end of the year. So should we believe that means the production of Buenavista is going to return to the normal level in the very beginning of next year? That's the first question. Yes, that's our goal. We'll be working in the fourth quarter to ramp up at full capacity the new SXEW III plant. As we indicated in our report to the market, in our press release, we have already the leaching portion of the plant operating and we opened up the second half, or the other portion of the electrolytic refinery also to start operation. So that will be up and running in Plus we have our current operations of Buenavista that has been basically normal, with no inconvenience, through Marcelo Aguiar - Goldman Sachs - Analyst Okay. And if you can elaborate just a little on the byproduct. You have a guidance for moly, zinc and silver, and some of the other production. On molybdenum production, we are expecting 23,000 tons for I think that could be the goal for next year, or maybe a little bit higher than that. But let me emphasize, Marcelo, that we will provide a detailed guidance on copper as well as other metals production in the first call of Marcelo Aguiar - Goldman Sachs - Analyst Okay, fair enough. Thank you. Mitesh Thakkar, FBR. Please go ahead. Mitesh Thakkar - FBR Capital Management - Analyst 10

11 Good afternoon, gentlemen. My first question is just on the CapEx side. I understand, you know from the CapEx numbers you provided, you are expecting about $6.9 billion of CapEx spending between 2014 and If I remember this correctly, last quarter this number was about $5.9 billion. So it looks like the CapEx went up. Does that make sense? And if it is, what are the drivers for that? COMPANY NOTE: To clarify, the aforementioned CapEx forecast considers some projects which have not yet been approved by our Board. Excluding them CapEx guidance is: $1.6 billion for 2014, $1.8 billion for 2015, $1.1 billion for 2016, $1.0 billion for 2017 and $450 million for No, we haven't made any significant adjustments in our capital budget, Mitesh. Basically the two projects that changed their budgets were the Tia Maria project that increased from about $1 billion to $1.4 billion. We reported that I believe, a couple of quarters ago. And in the case of Toquepala, the initial budget was about $600 million. We changed the scope of the project a few years ago actually. We increased the capacity of the concentrator, and with that the budget of the project increased to about $1 billion. And now we're having an adjustment to that figure that was provided to the market recently of $1.2 billion. So those are the only changes, but this has been for a while out there. Mitesh Thakkar - FBR Capital Management - Analyst Okay. We'll take this offline. I just have some doubt about the numbers. But second, on the production change from 800 some thousand tons to 758,000 tons in 2015, can you give us some background how much of that was driven by the acid spill issue and how much of that is just normal delays in the project. It's quite clearly the second reason that you indicated. The spill has impacted our ramping up of the SXEW III. We have had some delays on the concentrator, and the changes in our production guidance is related to that rather than anything else. Mitesh Thakkar - FBR Capital Management - Analyst Okay. Thank you very much. Good luck. Mandeep Singh, JP Morgan. Please go ahead. Mandeep Singh - JP Morgan - Analyst Hi. Thank you. Hi, Raul. My question is related to the Buenavista concentrator expansion. You know we saw that you pushed the date of startup from first half of 2015 to third quarter of Could you talk about the reasons behind this delay and if it had anything to do with the recent spill at SXEW III plant? The delay has basically some technical reasons that are related to the way that the project has been operating. At the beginning of this problem we had to slow down the works at the concentrator, and that created a lag, plus some other factors that affected the project. So that's why we rescheduled the startup for the third quarter of Mandeep Singh - JP Morgan - Analyst Thank you. And another question is basically related to the SXEW III plant. In the new guidance of 658,000 tons, could you specify how much of that you assume would be contributed by the SXEW III plant? And what are the steps that are still pending before, that you need to achieve before you could achieve full ramp up in terms of critical steps in terms of fixing the problem that at the first place caused the spill? 11

12 On the SXEW III, Mandeep, we were expecting to be now at full capacity. That hasn't been the case. We will be finishing the ramping up through 2014 and that somehow impacts the effect of the SXEW III in next year, in terms of its production capacity. I think that other than that, generally speaking, our ramping up of production will move on in the right direction, not at the pace that we were expecting, but on a reasonably good way. And that's why, even though we are giving some guidance on 2015 now, we will like to review and give you a more accurate number between now and our January call. Mandeep Singh - JP Morgan - Analyst Okay. Thank you. Alfonso Salazar, Scotiabank. Please go ahead. Alfonso Salazar - Scotiabank - Analyst Thank you. Raul, I have one question regarding zinc because of the decline in production. So, can you explain what is happening at IMMSA, particularly at Charcas mine? And if you can tell us a production guidance for the next few quarters so we see how this is going to recover? Yes. What is happening at IMMSA is that we have two operating units affected by different reasons. In the case of Santa Eulalia we have had a flood that is affecting the production. It's currently not producing. In the case of Charcas, we had a transformer that was operating incorrectly and had to be replaced. That created a delay in the production of Charcas, or a slowdown in the production of Charcas. For the year, for this year, 2014, we're expecting to produce about 68,000 tons of zinc from our IMMSA mines. That includes the production of Charcas and we're still not considering Santa Eulalia in this forecast, but if it comes into operation earlier than that, it will certainly give us some extra production of zinc. Alfonso Salazar - Scotiabank - Analyst Okay. Thank you. And the second question is regarding the Angangueo project. I don't know if you can give us an update on this project, when it could be ready, if you have it in your estimates and when. And also about the permitting, if you have any update on it. Well this is a project that is moving forward relatively slow. We are not putting all the CapEx resources that we would like on this project. We are waiting for the permitting to develop the project as it was designed. At this point there is not much that I can report on that. Alfonso Salazar - Scotiabank - Analyst Okay, and the production, the copper production, I think it was 10,000 tons, when you have it in your estimates starting? Or it's not in your estimates at all? We don't have Angangueo at this point in our production forecast. 12

13 Alfonso Salazar - Scotiabank - Analyst Okay, great. Thank you. Sasha Bukacheva, BMO Capital Markets. Please go ahead. Sasha Bukacheva - BMO Capital Markets - Analyst Hi, good morning everyone. Just hoping to get some clarification. So the production guidance for next year has been reduced by about 80,000 tons I gather, from 840,000 tons to 760,000 tons. So just trying to get a better sense of how much I guess less production are you now expecting from the SXEW circuit at Buenavista versus the new concentrator at Buenavista? On the SXEW III, we're expecting to produce about 29,000 tons this year, Sasha. Sasha Bukacheva - BMO Capital Markets - Analyst No, no, for next year. For 2015, because you said you're still going to be going through a ramp up. No, next year we expect to initiate 2015 at its full capacity of 120,000 tons. Sasha Bukacheva - BMO Capital Markets - Analyst Okay. And then what are you expecting then from the new concentrator? The new concentrator has a capacity of 188,000 tons. We're expecting about 80,000 tons coming from it. Sasha Bukacheva - BMO Capital Markets - Analyst In Got it. Okay. Second question, so I understand that there has been considerable cleanup completed at the river, and the wells have been reopened. I'm just curious as to whether or not the investigation or any claims are still ongoing, and if there is risk to any further requirements by a government environmental agency. Daniel Muñiz - Grupo Mexico - CFO Well, of course as you know this has been a big process here. We've completed, the first thing to do was complete the cleanup. It's been completed 100%. The wells have been reopened, all of them, as you pointed out. There's still administrative proceedings going on, some requirements from the authorities to comply with, or do this, etcetera, but they're mainly administrative. We are very positive that it will be resolved and move forward with the project. Sasha Bukacheva - BMO Capital Markets - Analyst 13

14 But so when do you? Do you have a kind of sense of the timeline for when the investigation might be completed or when that process might be closed? Daniel Muñiz I wouldn't call it an investigation. I would define that as administrative proceedings. I mean, kind of like the authorities went through it in a very thorough due diligence regarding that plant in particular, and I don't know, things like in a couple of other, our own wells that we take water from, we've been analyzing differences that we had and solving those, the same thing with other mining permits. Unfortunately there's not a strong deadline there, but we're working towards solving this ASAP, and we'll report back to all of you as soon as we have news. Sasha Bukacheva - BMO Capital Markets - Analyst Okay. Okay, thanks for that. That's it for me. Alex Hacking, Citi. Please go ahead. Alex Hacking - Citi - Analyst Hi, Raul. A couple of clarifications. Firstly on the SXEW III at Buenavista. As I understand, the solvent extraction plant have been closed down by the authorities. And I want to clarify if that has been reopened or not. And then the second question. Sorry? Daniel Muñiz - Grupo Mexico - CFO Let me clarify that. The SXEW plant has not been cancelled by the authorities. What was put on a provisional stoppage was the construction of a pond, a leaching pond, many kilometers away from the plant, which is where the accident happened while it was being built. So the SXEW is not under any cancellation, warning or whatever. The SXEW is producing and we are assessing what's the best way to get up to full production. Alex Hacking - Citi - Analyst Okay, as I understood it, the solvent extraction have been closed. The electro winning was still operating but using solvent from the other plants. That's incorrect? Daniel Muñiz - Grupo Mexico - CFO We have many leaching ponds throughout that, as you know, Buenavista is one of the largest mines in the world. We have many ponds and you can take PLS from any other pond within the premises. And we've been sending, what it's really it's just one of the ponds where the accident happened, which was under construction actually. That's what's been put on a provisional, I don't know how you say it, cancellation, closure, whatever. Which we're hoping to lift ASAP. Alex Hacking - Citi - Analyst Okay. And then just coming back to the guidance next year. I don't want to hop on it, but I'm a little confused because this year you're going to produce 658. Next year you're going to produce 758. So it's 100 more. But then the guidance for the SXEW III is to increase to 120 from 29, which 90 thousand tons. And then for the new concentrator, it's to produce 80 thousand tons. So I'm trying to reconcile those numbers. Okay, Alex, I didn't want to interrupt you, but let me clarify and I apologize for the changes I'm going to make. On the SXEW III, we're considering 80,000 tons for next year. That's part of the ramping up of the plant. And on the concentrator, the second concentrator, it's 50,

15 Alex Hacking - Citi - Analyst Okay. I made a mistake with the information, and I'm correcting it now. The difference, because these two add to 130, comes from a reduction in ore grade at the La Caridad operation. Alex Hacking - Citi - Analyst Okay. Clear. And then just if I could follow up. Any reason why the new SXEW is at if it's going to reach capacity in 4Q and capacity is 120,000? Well we're expecting to operate it at full capacity. Currently, as I said, the refinery is at full speed. And we are giving you a guidance for 2015, but we may revise this guidance in our next call. So I think that the best estimate for next year will be provided when we have the conference call in January. Alex Hacking - Citi - Analyst Okay, perfect. It's clear. Thanks, Raul and Daniel. Daniel Muñiz - Grupo Mexico - CFO I think it's important to, there's a little bit of confusion. I think it's important to clarify that, as you just pointed out, there's going to be an important increment of production for next year, for And that comes, as Raul just pointed out, from new production on our concentrator two in Buenavista, and from our new production in the SXEW III at Buenavista. I think the confusion lies in how is the river affecting or not, and when is this going to be finished., I mean, the pond that have been put in provisional closure, will be lifted. However, we are estimating that we're going to complete this this year and have both of those plants starting up next year and increasing our production. I think that's the main point. I know you're all making your numbers there, so are we. But the main point is we're increasing more than 100,000 tons next year. And we've just experienced a little delay on the ramp up of this project. I guess that's what I would like you to have in mind. Alex Hacking - Citi - Analyst Thanks. Marlene Finny, Grupo Bursatil Mexicano. Please go ahead. Marlene Finny - Grupo Bursatil Mexicano - Analyst Hi, good morning everyone. Thank you so much for taking our questions. I have two questions. My first question is regarding CapEx, especially in Buenavista. Should we expect an increasing CapEx for Buenavista for the spill? And my second question is regarding the $37 million of the expenses. Should we expect this to be a periodical expense? I know that $14 million has already been spent, but should we expect, or do you have an estimate of how much could be recorded in the fourth quarter, and maybe the next quarters? Thank you. 15

16 No. On the second question, Marlene, and thank you very much for both of them. We don't expect to, we will see how this evolves. And in terms of impact on our financials, we will, as we move on into 2015, we'll see if it is required to add some funds to the trust fund. The trust fund has a limit of $150 million, and from those we are already recognizing $37 million, and we'll see as we move on. Marlene Finny - Grupo Bursatil Mexicano - Analyst Okay. On the Buenavista CapEx, we are looking into the work that has to be done. Regarding this, specifically we may have a change in our CapEx, but very small, in the range of $50 to $70 million in the total CapEx expected for Buenavista. Marlene Finny - Grupo Bursatil Mexicano - Analyst Okay. Thank you so much. Marcos Assumpcao, Itau BBA. Please go ahead. Marcos Assumpcao - Itau BBA - Analyst Hi, good afternoon everyone. Thank you for taking the question. First question is on the copper prices, on the copper market actually. We have seen on all the commodities like iron ore and coking coal, for example, prices undershooting the marginal cash cost. And on the copper market we have seen quite resistant support at $3.00 per pound. Can you comment a little bit on what are the reasons that you believe that copper prices are so sustained at those levels and you should think there is any risk of copper prices going below that on a sustainable basis? Well on the copper market, we have one element which is important. About between 6% and 10% of the total refined copper supply, and I'm specifically speaking about the refined copper market, okay. It's about between 6% and 10% of the total copper supply over time, comes from scrap copper. And scrap copper appears at high prices and disappears very quickly when prices are not that good. That is a very strong balancing mechanism that we have at the copper market, and it's currently affecting, or supporting prices. For what comes in the next few quarters, we don't know where copper prices are going to be, however we believe that they are going to be at around these levels as a possibility. But we are not in the business of providing forecasts for copper prices. We do understand how the market works and have our own view on that. Marcos Marcos Assumpcao - Itau BBA - Analyst Okay, and just a follow-up question on the accident at Buenavista. There were a lot of talks ranging on all of the potential impacts for the company. One of them is a little bit weird in my view, one of the comments that probably were out in some newspapers and from more radical people. Just to clarify that with you, were there any talks between the regulatory agencies and the responsible in Mexico and the company about revoking the license, or this is completely out of question? Daniel Muñiz - Grupo Mexico - CFO 16

17 I think the latter. That is completely out of question. I think there's no grounds for that. It was in Mexico particularly locally with an overshoot in terms of the media and the way we saw it. And I think you are right in your last emphasis. Marcos Assumpcao - Itau BBA - Analyst Perfect. Thank you very much. Andreas Bokkenheuser, UBS. Please go ahead. Andreas Bokkenheuser - UBS - Analyst Yes, thank you very much. Just a follow-up on the waste water spill site. Last we spoke it was my understanding that obviously one of the main leaching ponds supporting the SXEW III expansion has still been shut down. I assume that's still the case. If that remains shut down, will you still be able to ramp up SXEW III at full capacity next year using the support of the other leaching ponds, or would you possibly have to downgrade your production targets for the SXEW III expansion for next year? Thank you. Daniel Muñiz - Grupo Mexico - CFO Right, thank you for your comment. And you're absolutely right, and that's what we're working on assessing. Because what I was commenting earlier is, there are many leaching ponds, of course the one that you were referring that was under construction and where the accident happened, was built for the SXEW III. We're working on an alternative plan although we believe that this, the closure was a provisional closure, and just for us to provide a like redundancy in terms of safety dams and measures going forward for this never to happen again in this particular pond. And of course it's not going to happen again because this happened because it was under construction, for the completion of the SXEW system, its Solutions System if you like. So we're working on assessing how we can fill up the new SXEW III with the other ponds that we have and that we've had for many, many years. So that's why it's been a little bit of a confusion on the guidance for the SXEW III. But we're working on that. We'll give you the full details in the next quarter. As soon as we have lifted the closure we'll make a press release. But the idea is to have it, as Raul pointed out, at least on 80,000 tons. There's another measure that we're working on, which is, you know we have a SXEW plant I, an SXEW plant II, and this new one is the SXEW plant III in Buenavista. So we are working on how we work the three of them together. For instance, we might decide to close the I and work with the II and III, etcetera. So we are working as we are talking today on finalizing this. We had a busy meeting yesterday with the environmental authorities in Hermosillo and we are going forward to lifting this closure so that we are able to report back to you ASAP. Andreas Bokkenheuser - UBS - Analyst Okay, that's very clear. Andreas, let me add to what Daniel said, that we are considering. We're reviewing our current view on production for next year at this point. We expect to provide a new guidance and we're reviewing it because we want to have a better plan for next year than what I mentioned, the 758,000 tons, okay. Andreas Bokkenheuser - UBS - Analyst Okay, that's clear. Thank you. 17

18 Carlos de Alba, Morgan Stanley. Please go ahead. Carlos, your line is now open. Carlos de Alba - Morgan Stanley - Analyst Yes, sorry. Thank you very much for the follow-up. Raul or Daniel, could you comment as to how do you see that the disbursements of the monies that remain in the trust, that was created for the spill, do you expect to see every quarter around $37 to $38 million going into the P&L? But the disbursements at the rate closer to what you mentioned earlier, Raul, or perhaps $13.5 million per month. Or how do you see this? And the second question is, do you expect to use all of the funds that were put in the trust? And in the event that the total remediation costs are less than what was put into the trust, what will happen to those monies? Daniel Muñiz - Grupo Mexico - CFO Let me just explain how the trust fund works, from a bigger picture perspective. When we set up the trust with the federal government, there weren't any studies or budget to come up with the amount. It was an agreement between the government and the company. And the idea is if it's more, it's more, if it's less, it's less. So that's why we didn't put the whole 2 billion pesos to start off with, and we started off with 500 million pesos. We completed the cleanup. I mean everything is pretty much back to normal there. And I guess the discussion going forward is, are there anything outstanding or not. And that's what we're doing now, Carlos. So that's what we'll do now as we speak, because it hasn't been spent the full 500 million pesos that we deposited first. The cleanup is completed. We've completed some of the tests. We are filing the tests today, I mean on soils, etcetera. Water is already clean. The authorities have said that. On soil, we filed the tests, we have very good news on the soils as well. So we expect this to kind of conclude very soon. Unfortunately this is something that has to be said by or concluded by the authorities, not us, Carlos, that's why we cannot say a definite either date or amount. But this is pretty much where we are to date. Carlos de Alba - Morgan Stanley - Analyst All right. Fair enough. Thank you very much. Carlos, let me clarify on the financial side of this. We charged in the third quarter, $10.4 million to operating costs that are outside the trust fund, okay. Then, to complete the cleanup, we added another $4.3 million through October. That's in total $14.7 million that are included in our operating costs related to the spill. And as has been mentioned several times through the call, we already finished the cleanup of this spill. On the trust fund, which is different, it is a fund for compensation or environmental reclamations. We have spent $5.5 million of the trust, of the $37 million, at the closing of September. And about $8.4 million through the first 15 days of October. A total of $13.9 million has been used of the $37 million of the trust fund. Carlos de Alba - Morgan Stanley - Analyst Perfect. Thank you very much, Raul. We have a follow-up question from Leonardo Correa from BTG Pactual. 18