The following discussion provides information that management believes is relevant to an assessment and understanding of the condensed consolidated financial condition and results of operations ofSouthern Copper Corporation and its subsidiaries (collectively, "SCC", "the Company", "our", and "we"). This item should be read in conjunction with our interim unaudited Condensed Consolidated Financial Statements and the notes thereto included in this quarterly report. Additionally, the following discussion and analysis should be read in conjunction with the Management Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements included in Part II of our annual report on Form 10-K for the year endedDecember 31, 2021 .
EXECUTIVE OVERVIEW
Business: Our business is primarily the production and sale of copper. In the process of producing copper, a number of valuable metallurgical by-products are recovered, which we also produce and sell. Market forces outside of our control largely determine the sale prices for our products. Our management, therefore, focuses on value creation through copper production, cost control, production enhancement and maintaining a prudent capital structure to remain profitable. We endeavor to achieve these goals through capital spending programs, exploration efforts and cost reduction programs. Our aim is to remain profitable during periods of low copper prices and to maximize financial performance in periods of high copper prices. We are one of the world's largest copper mining companies in terms of production and sales and our principal operations are inPeru andMexico . We also have exploration programs inChile ,Argentina andEcuador . In addition to copper, we produce significant amounts of other metals, either as a by-product of the copper process or through a number of dedicated mining facilities inMexico .
Outlook: Various key factors will affect our outcome. These include, but are not limited to, the following:
Sales structure: In the second quarter of 2022, approximately 77.9% of our ? revenue came from the sale of copper; 8.6% from molybdenum; 4.3% from silver;
3.5% from zinc; and 5.7% from various other products, including gold, sulfuric
acid and other materials.
Copper: In the second quarter of 2022, the LME copper price decreased from an
average of
During the month of June, we had a significant drop in copper prices down to
? its current level of
outlook for the Company. A concern for a simultaneous recession in the
prices. These fears are based upon the following factors:
? The consistent increment in interest rates by the FED, the
relevant central banks.
? The slowdown of the Chinese economy due to Covid-19 restrictions and the
construction activities 31% YoY reduction.
However, we should note that:
The most relevant market intelligence houses for the copper market are
? expecting a market in balance or with a small deficit for 2022 of about 200,000
tons.
? This assumes growth in demand of 1.0-2.5% in 2022, particularly in terms of
cathode consumption in the US.
There is uncertainty regarding future production growth in
? which together represent about 40% of the global supply.
production drop of 7% in the first quarter of 2022, while 13% of
production is currently at risk in Las Bambas.
The major warehouses have not reported a relevant increase in copper
? inventories, which were as ofJune 30 at 8 days of consumption, a relatively low level. 38 Table of Contents We believe the economic slowdowns in theU.S. ,China andEurope have temporarily weakened the demand for copper and are driving reductions in current prices. It is important to emphasize that copper plays a leading role in the global shift to clean energy, which correlates positively with our assertion that the underlying demand for copper will be strong in the long-term. In this scenario, we believe the current cycle of low prices should be short-lived.
Molybdenum: Represented 8.6% of our sales in the second quarter of 2022 and is
? currently our most important by-product. Molybdenum prices averaged
pound in the second quarter of 2022, compared to
2021. This represented a 31.7% price increase.
Regarding this by-product, we believe that prices will be supported by lower
exports from
Molybdenum is mainly used in the production of special alloys for stainless steel that require significant hardness and corrosion and heat resistance. New uses for this metal are associated with lubricants, sulfur filtering of heavy oils and shale gas production.
Silver: Represented 4.3% of our sales in the second quarter of 2022. We believe ? that the prices for silver will be supported by its intensive level of
industrial use and the fact that, like gold, it represents value shelter in
times of economic turmoil.
Zinc: Represented 3.5% of our sales in the second quarter of 2022. We consider ? zinc has very good long term fundamentals due to high levels of industrial
consumption and expected production. Production: For 2022, we expect to produce 898,200 tons of copper, which
represents a decrease of 6.3% compared to 2021. We expect our copper production ? to bounce back in 2023 and reach 971,200 tonnes as we get the Peruvian
production back on track and generate new production through our projects at
We also expect to produce 25,700 tonnes of molybdenum, which represents a decrease of 15.2% over our 2021 production levels. In 2022, we expect to produce 18.9 million ounces of silver, which represents a slight decrease of 0.5% over our 2021 production level. Additionally, we expect to produce 66,900 tonnes of zinc from our mines, in line with 2021 production.
Capital Investments: In the first semester of 2022, we spent
5.0% compared to the amount registered for the same period in 2021.
CYBERSECURITY
Our operations depend upon information technology systems that may be subject to disruption, damage or failure from different sources, including, without limitation, installation of malicious software, computer viruses, security breaches, cyber-attacks and defects in design. In recent years, cybersecurity incidents have increased in frequency and include, but are not limited to, malicious software, attempts to gain unauthorized access to data and other electronic security breaches that could lead to disruptions in systems, unauthorized release of confidential or otherwise protected information and the corruption of data. We have implemented appropriate preventative measures to mitigate potential risks by implementing an information security management system, which ensures application of controls that are frequently reviewed and tested. InMarch 2021 , we experienced a Ransomware cyber-attack, which was conducted by individual hackers. This cyber-attack encrypted a total of 420 servers and units of personal equipment. However, due to the quick response of our IT team, our Enterprise Resource Planning software was not affected by the aforementioned attack. After the attack, we immediately began a remediation and recovery process and completely restored the affected servers. The forensic investigation did not identify concrete evidence that any information was stolen during the 39
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attack. However, we maintain active lines of cyberintelligence and continue to monitor the DarkWeb/DeepWeb and social networks to identify any publication or activity related to the Company to validate the technological controls affected during the attack and ensure that our systems infrastructure remains secure. InMarch 2021 , we appointed a new head of theInformation Technology Department , who implemented a new information security strategy to ensure business continuity based on processes (controls and corporate governance framework), technology and human capital (organizational culture). InJuly 2021 , Grupo Mexico appointed a Chief Information Security Officer, who has been actively involved in the development and implementation of this information security strategy. In addition, from July to September of 2021, we performed a cybernetic forensic analysis with the assistance of a professional consulting firm with international experience in this area. The recommendations received were integrated in current information security programs. Additionally, AMC set up a task force to oversee ongoing initiatives and ensure that targets are met. We are actively following this matter with the task force, our internal audit team and; will also require the expertise of third parties. Our new information security strategy is being executed on a continuous basis. The compliance, internal control, information technology and internal audit departments are all working together to integrate reference frameworks, risk management models and the necessary controls to continue executing this strategy and corresponding programs. To support our commitment to the strategy, we are working under the international framework for reference and standard, such as ISO, COBIT and NIST, to certify the Company´s security systems. The Company has also established an information security culture with the purpose of training, communicating and maintaining permanent awareness among the workforce. On the governance framework side, the Company has created aCommittee of Information Security and set up security policies and standards, among other actions.
For 2022 we have a non-material special budget to continue improvements in this area.
CUAJONE STOPPAGE OF OPERATIONS
OnFebruary 28, 2022 , a small group of protesters from the community of Tumilaca, Pocata, Coscore andTala , which have 472 residents in total, seized the facilities at the Viña Blanca water reservoir and cut off the water supply to the homes of the approximately 5,000 people who live in Cuajone. Prior to this illegal action, onFebruary 18, 2022 , the railway between Cuajone and Ilo was also blocked by a group of community members. They claim, the Company usurped their land and demand compensation of$5.0 billion , in addition to the permanent payment of 5% of net profits. After several unsuccessful attempts by the authorities to restore order through dialogue, onApril 20, 2022 , the Peruvian government declared a state of emergency in the Moquegua region. OnApril 21, 2022 , the protesters returned the installations of the Viña Blanca water reservoir and the railway to the Company. Our personnel immediately evaluated the damage caused to the facilities by acts of vandalism and took the necessary steps to resume production at the Cuajone mining unit. OnApril 25, 2022 , the Cuajone mine, concentrator, industrial railroad and related facilities reached full capacity. Based on the 2022 Company operating plan, the total production loss during the stoppage period was 22,208 tonnes of copper content and 485 tonnes of molybdenum, which translates into a reduction in sales of$228 million . We also recorded$14.0 million of unabsorbed fixed costs, which directly impacted the cost of sales. To mitigate the impact on sales' contracts, measures were taken to acquire concentrates from our Mexican Operations and third parties to maintain an adequate supply to the smelter. Despite the force majeure event at Cuajone, the Company was able to fulfill all sales'commitments without delays. OnApril 30, 2022 the Peruvian government issued a Ministerial Resolution to set up a three-party-dialogue-table with members of the community, government and Company officials to better understand all parties' concerns. As of today, nine round-table meetings and three direct meeting with the community have been held. The Company has proposed plans to invest in social programs that address the needs voiced by the communities and has indicated interest in purchasing land near the Cuajone operations to establish a buffer zone to protect installations and production down the line. We strongly believe that the programs that we have proposed will make meaningful and sustainable contributions to the community's progress and wellbeing. These efforts will be complemented by 40
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positive impacts through the
ECONOMIC CONSEQUENCES OF RUSSIA´S INVASION OF
TheUkraine -Russia war that broke out in February of 2022, has generated a series of impacts in the global economy and on international trade including, but not limited to, volatility in commodity prices, cost and supply chain pressures and availability and disruption in capital markets. This has forced companies to adjust their supply and commercial plans to deal with shipping delays for goods and higher prices for the same. The increase in the cost of oil and energy, coupled with saturation at ports, which was already high due to a surge in global economic activity after the COVID-19 pandemic ebbed, has driven up the prices of the vast majority of products and generated uncertainty in economies. Although the Company does not currently have operations inUkraine ,Russia or other parts ofEurope , this situation is affecting the countries in which we operate and in which our clients and suppliers operate, although the extent of the impact varies.
As of
Below, we discuss several matters that we believe are important to understand the results of our operations and financial condition. These matters include, (i) our earnings, (ii) our production, (iii) our "operating cash costs" as a measure of our performance, (iv) metal prices, (v) business segments, (vi) the effect of inflation and other local currency issues, and (vii) our capital investment and exploration program. Earnings: The table below highlights key financial and operational data of our Company for the three and six months endedJune 30, 2022 and 2021 (in millions, except copper price, percentages and per share amounts): Three months endedJune 30 ,
Six months ended
2022 2021 Variance % Change 2022 2021 Variance % Change Copper price LME 4.32 4.40 (0.08) (1.8) % 4.43 4.13 0.30 7.3 % Pounds of copper sold 430.7 514.9 (84.2) (16.4) % 889.2 1,044.4 (155.2) (14.9) % Net sales$ 2,306.9 $ 2,897.0 $ (590.1) (20.4) %$ 5,070.7 $ 5,429.5 $ (358.8) (6.6) % Operating income$ 808.5 $ 1,675.2 $ (866.7) (51.7) %$ 2,278.6 $ 3,026.8 $ (748.2) (24.7) % Net income attributable to SCC$ 432.3 $ 932.7 $ (500.4) (53.7) %$ 1,217.1 $ 1,696.6 $ (479.5) (28.3) % Earnings per share$ 0.56 $ 1.21 $ (0.65) (53.7) %$ 1.57 $ 2.19 $ (0.62) (28.3) % Dividends per share$ 1.25 $ 0.70 $ 0.55 78.6 %$ 2.25 $ 1.30 $ 0.95 73.1 % Net sales in the second quarter of 2022 were 20.4% lower than in the same period of 2021. This decrease was driven by a drop in prices for copper (-1.8% - LME) and silver (-15.4%) and by a decrease in the sales volume of all our major products due to an uptick in the finished goods inventory, a decrease in production due to the Cuajone stoppage and lower ore grades. Net sales in this quarter were also negatively affected by the accounting adjustment of$173.5 million for a price variation on sales made and not yet collected. This effect was partially offset by higher prices for molybdenum (+31.7%) and zinc (+34.8%). Net income attributable to SCC in the second quarter of 2022 was 53.7% lower than in the same period of 2021. This scenario has been compounded by increases in costs for fuel, power and some other operating materials due to inflation. In a context impacted by a drop in copper prices, we registered a significant mark-to-market adjustment to open sales. Quarterly results were also affected by a 25,624 tonne decrease in copper production at our Peruvian operations, which 41 Table of Contents
was mainly attributable to the stoppage at Cuajone and lower ore grades. In order to avoid a force majeure event, production losses were temporarily offset with copper purchased from third parties, albeit at a higher cost.
Net sales in the first six months of 2022 were 6.6% lower than in the same period of 2021, due to lower sales volume of
copper (-14.9%), silver (-10.5%), molybdenum (-5.8%) and a mark- to-market adjustment to open sales that represents a
decrease of
were partially offset by higher average metal prices for almost all our main products in the first six months of 2022:
copper (+7.3% - LME), molybdenum (+48.6%), zinc (+35.9%) and by an increase in sales volumes of molybdenum
(+13.1%) and zinc (+0.1%). Net income attributable to SCC in the first six months of 2022 was 28.3% lower than in the same period of 2021. This decrease was mainly attributable to lower sales while operating costs had an 16.2% increase.
Production: The table below highlights our mine production data for the three
and six months ended
Three months endedJune 30 ,
Six months ended
2022 2021 Variance % Change 2022 2021 Variance % Change Copper (in million pounds) 459.5 522.7 (63.2) (12.1) % 932.4 1,048.3 (115.9) (11.1) % Molybdenum (in million pounds) 13.9 15.4 (1.5) (9.4) % 29.6 31.3 (1.7) (5.4) % Silver (in million ounces) 4.4 4.6 (0.2) (4.3) % 8.7 9.6 (0.9) (9.0) % Zinc (in million pounds) 33.4 37.7 (4.3) (11.5) % 65.8 74.0 (8.2) (11.1) %
The table below highlights our mine production data for the three and six months
ended
Three Months Ended June 30, Six Months Ended June 30, Copper (in million pounds): 2022 2021 Variance % Change 2022 2021 Variance % Change Toquepala 98.2 130.2 (32.0) (24.5) % 210.7 258.6 (47.9) (18.5) % Cuajone 68.7 93.2 (24.5) (26.3) % 122.5 180.7 (58.2) (32.2) % La Caridad 58.5 72.9 (14.4) (19.8) % 123.1 145.2 (22.1) (15.3) % Buenavista 228.9 221.9 7.0 3.1 % 466.5 453.8 12.7 2.8 % IMMSA 5.2 4.5 0.7 16.5 % 9.6 10.0 (0.4) (4.2) % Total mined copper 459.5 522.7 (63.2) (12.1) % 932.4 1,048.3 (115.9) (11.1) %
Second quarter: Mined copper production in the second quarter of 2021 fell by 12.1% to 459.5 million pounds compared to 522.7 million pounds in the second quarter of 2021. This was mainly attributed to a production drop due to the Cuajone mine stoppage (-26.3%) and lower copper production at Toquepala (-24.5%) andLa Caridad (-19.8%) due to lower grades. This was partially offset by an increase of production at ourBuenavista (+3.1%) and IMMSA (+16.5%) mines. Molybdenum production decreased 9.4% in the second quarter of 2022 with regard to the levels registered in the second quarter of 2021. This was attributable to a decrease in production at our Cuajone (-23.9%) mine, which was primarily attributable to stoppage at this unit, and secondarily to a decrease in Toquepala (-5.7%) andLa Caridad (-12.5%) mines due to lower grades and recoveries. This effect was partially offset by a increase in production at theBuenavista (+3.3%) mines due to higher grades. Silver mine production decreased 4.3% in the second quarter of 2022, compared with the same period of 2021, due to a drop in production at the Toquepala (-27.6%), Cuajone (-22.7%) andLa Caridad (-12.5%) operations. This was offset by higher production an theBuenavista (+5.5%) and IMMSA (+9.7%) operations.
Zinc production decreased 11.5% in the second quarter of 2022 compared with the
same period of 2021. This decrease was mainly attributable to a drop in
production at the
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Six months: Mined copper production in the first six months of 2022 decreased 11.1% to 932.4 million pounds compared to 1,048.3 million pounds in the same period of 2021. This decrease was mainly attributable to the Cuajone
mine stoppage (-32.2%) and a drop in production at our Toquepala (-18.5%),
mines due to lower grades. This effect was slightly offset by an increase in
production at
Molybdenum production decreased 5.4% in the first six months of 2022 compared to the same period in 2021; this was mainly due to lower production at our Cuajone (-33.2%) andLa Caridad (-7.4%) mines, which was partially offset by higher production at the Toquepala (+1.9%) andBuenavista (+9.6%) mines. Silver mine production decreased 9.0% in the first six months of 2022; this was principally due to lower production at our Toquepala (-25.9%), Cuajone (-28.6%),La Caridad (-9.1%) and IMMSA (-3.6%) operations, which was partially offset by higher production atBuenavista (+4.0%) mine. Zinc production decreased 11.1% in the first six months of 2022 due to a fall in production at ourCharcas ,San Martin andSanta Barbara mines, principally due to lower grades. Operating Cash Costs: An overall benchmark that we use, which is a common industry metric to measure performance is operating cash costs per pound of copper produced. Operating cash cost is a non-GAAP measure that does not have a standardized meaning and may not be comparable to similarly titled measures provided by other companies. This non-GAAP information should not be considered in isolation or as substitute for measures of performance determined in accordance with GAAP. A reconciliation of our operating cash cost per pound of copper produced to the cost of sales (exclusive of depreciation, amortization and depletion) as presented in the consolidated statement of earnings is presented under the subheading, "Non-GAAP Information Reconciliation" on page 59. We disclose operating cash cost per pound of copper produced, both before and net of by-product revenues. We define operating cash cost per pound of copper produced before by-product revenues as cost of sales (exclusive of depreciation, amortization and depletion), plus selling, general and administrative charges, treatment and refining charges net of sales premiums; less the cost of purchased concentrates, workers' participation and other miscellaneous charges, including royalty charges, and the change in inventory levels; divided by total pounds of copper produced by our own mines. In our calculation of operating cash cost per pound of copper produced, we exclude depreciation, amortization and depletion, which are considered non-cash expenses. Exploration is considered a discretionary expenditure and is also excluded. Workers' participation provisions are determined on the basis of pre-tax earnings and are also excluded. Additional exclusions from operating cash costs are items of a non-recurring nature and the mining royalty charge as it is based on various calculations of taxable income, depending on which jurisdiction,Peru orMexico , is imposing the charge. We believe these adjustments allow our management and stakeholders to more fully visualize our controllable cash cost, which we believe is one of the lowest of all copper-producing companies of similar size. We define operating cash cost per pound of copper produced net of by-product revenues as operating cash cost per pound of copper produced, as defined in the previous paragraph, less by-product revenues and net revenue (loss) on sale of metal purchased from third parties. In our calculation of operating cash cost per pound of copper produced, net of by-product revenues, we credit against our costs the revenues from the sale of all our by-products, including, molybdenum, zinc, silver, gold, etc. and the net revenue (loss) on sale of metals purchased from third parties. We disclose this measure including the by-product revenues in this way because we consider our principal business to be the production and sale of copper. As part of our copper production process, much of our by-products are recovered. These by-products, as well as the processing of copper purchased from third parties, are a supplemental part of our production process and their sales value contribute to covering part of our incurred fixed costs. We believe that our Company is viewed by the investment community as a copper company, and is valued, in large part, by the investment community's view of the copper market and our ability to produce copper at a reasonable cost. 43
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We believe that both of these measures are useful tools for our management and our stakeholders. Our cash costs before by-product revenues allow us to monitor our cost structure and address areas of concern within operating management. The measure operating cash cost per pound of copper produced net of by-product revenues is a common measure used in the copper industry and is a useful management tool that allows us to track our performance and better allocate our resources. This measure is also used in our investment project evaluation process to determine a project's potential contribution to our operations, its competitiveness and its relative strength in different price scenarios. The expected contribution of by-products is generally a significant factor used by the copper industry to determine whether to move forward or not in the development of a new mining project. As the price of our by-product commodities can have significant fluctuations from period to period, the value of its contribution to our costs can be volatile.
Our operating cash cost per pound of copper produced, before and net of
by-product revenues, is presented in the table below for the three and six
months ended
Operating cash cost per pound of copper produced (1) (In millions, except cost per pound and percentages) Three Months Ended June 30, Six Months Ended June 30, 2022 2021 Variance % Change 2022 2021 Variance % Change Total operating cash cost before byproduct revenues$ 951.2 $ 817.9 $ 133.3 16.3 %
$ (465.3) $ (521.1) $ 55.8 (10.7) %$ (1,048.8) $ (914.8) $ (134.0) 14.6 % Total operating cash cost net of byproduct revenues$ 485.9 $ 296.8 $ 189.1 63.7 %
900.7 1,018.5 (117.8) (11.6) % Operating cash cost per pound before byproduct revenues$ 2.15 $ 1.61 $ 0.54 33.5 %$ 1.99 $ 1.56 $ 0.43 27.6 % Byproducts per
pound revenues$ (1.05) $ (1.02) $ (0.03) 2.9 %
$ (1.16) $ (0.90) $ (0.26) 28.9 % Operating cash cost per pound net of byproduct revenues$ 1.10 $ 0.59 $ 0.51 86.4 %$ 0.82 $ 0.66 $ 0.16 24.2 %
(1) These are non-GAAP measures. Please see page 59 for reconciliation to GAAP
measure.
(2) Net of metallurgical losses.
As seen in the table above, our per pound cash cost before by-product revenues in the second quarter of 2022 was 33.5% higher than in the same period of 2021. This increase was mainly attributable to an increase in production costs and the
unit cost effect generated by a 12.1% decrease in pounds of copper produced. Our cash cost per pound net of by-product
revenue for the second quarter of 2022 increased 86.4% when compared to the same period of 2021. This was mainly
attributable to a significant decrease in by-product revenues.
For the six months ended
the same period of 2021. This increase was mainly driven by an increase in production costs and the unit cost effect
generated by a 11.6% decrease in pounds of copper produced. The operating cash cost per pound of copper net of by product revenue was$0.82 in the six months endedJune 30, 2022 . This represented an increase of 24.2 % compared to the$0.66 reported in the same period of 2021. These results were mainly due to higher production costs and the unit cost effect generated by a 11.6% decrease in pounds of copper produced. Metal Prices: The profitability of our operations is dependent on, and our financial performance is significantly affected by, the international market prices for the products we produce, and for copper, molybdenum, zinc and silver in particular. We are subject to market risks arising from the volatility of copper and other metal prices. For the remaining six months of 2022, assuming that expected metal production and sales are achieved, tax rates remain unchanged and no effects are 44 Table of Contents
generated by potential hedging programs, metal price sensitivity factors would indicate the following change in estimated net income attributable to SCC resulting from metal price changes:
Copper Molybdenum Zinc
Silver
Change in metal prices (per pound except silver-per ounce)$ 0.10 $ 1.00 $ 0.10 $ 1.00 Change in net earnings (in millions)$ 59.0 $ 16.3 $ 7.5 $ 5.8
Business Segments: We view our Company as having three reportable segments and manage it on the basis of these segments. These segments are (1) our Peruvian operations, (2) our Mexican open-pit operations and (3) our Mexican underground operations, known as our IMMSA unit. Our Peruvian operations include the Toquepala and Cuajone mine complexes and the smelting and refining plants, industrial railroad and port facilities that service both mines. The Peruvian operations produce copper, with significant by-product production of molybdenum, silver and other material. Our Mexican open-pit operations includeLa Caridad andBuenavista mine complexes, the smelting and refining plants and support facilities, which service both mines. The Mexican open pit operations produce copper, with significant by-product production of molybdenum, silver and other material. Our IMMSA unit includes five underground mines that produce zinc, lead, copper, silver and gold, and several industrial processing facilities for zinc, copper and silver.
Segment information is included in our review of "Results of Operations" in this item and also in Note 14 "Segment and Related Information" of our condensed consolidated financial statements.
Inflation and Exchange Rate Effect of the Peruvian Sol and the Mexican Peso: Our functional currency is theU.S. dollar and our revenues are primarily denominated inU.S. dollars. Significant portions of our operating costs are denominated in Peruvian sol and Mexican pesos. Accordingly, when inflation and currency devaluation/appreciation of the Peruvian currency and Mexican currency occur, our operating results can be affected. In recent years, we believe such changes have not had a material effect on our results and financial position. Please see Item 3. "Quantitative and Qualitative Disclosures about Market Risk" for more detailed information. Capital Investment Programs: We made capital investments of$429.7 million in the six months endedJune 30, 2022 , compared to$452.4 million in the same period of 2021. In general, the capital investments and investment projects described below are intended to increase production, decrease costs or address social and environmental commitments. Set forth below are descriptions of some of our current expected capital investment programs. We expect to meet the cash requirements for these projects by utilizing cash on hand; internally generated funds and additional external financing, including funding received inSeptember 2019 . All capital spending plans will continue to be reviewed and adjusted to respond to changes in the economy and market conditions.
Projects in
Buenavista Zinc - Sonora: This project is located within theBuenavista facility and includes the development of a new concentrator to produce approximately 100,000 tonnes of zinc and 20,000 tonnes of copper per year. We have completed the engineering study. In order to continue with the project, stronger preventive measures to combat COVID-19 have been put in place. Procurement has progressed 99% and all the main equipment is on site. Construction site works are in progress. The project has all the necessary permits and the capital budget is$413 million . We expect to initiate operations in the second half of 2023. As ofJune 30, 2022 , we had invested$264.9 million in this project. When completed, we anticipate that this new facility will double the Company's zinc production capacity and will provide 490 direct jobs and 1,470 indirect jobs.Pilares - Sonora: Located six kilometers fromLa Caridad , this project consists of an open-pit mine operation with an annual production capacity of 35,000 tonnes of copper in concentrate. A new 25-meter wide 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 theLa Caridad copper concentrator. This project will significantly improve the overall mineral ore grade (combining the 0.78% expected fromPilares with 0.34% fromLa Caridad ). The budget forPilares is$159 million of which we have invested$80.9 million as 45
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of
El Pilar - Sonora: This low-capital intensity copper greenfield project is strategically located inSonora, Mexico , approximately 45 kilometers from ourBuenavista mine. Its copper oxide mineralization contains estimated proven and probable reserves of 317 million tonnes of ore with an average copper grade of 0.249%. We anticipate thatEl Pilar will operate as a conventional open-pit mine with an annual production capacity of 36,000 tonnes of copper cathodes. This operation will use highly cost efficient and environmentally friendly SX-EW technology. We estimate a development investment of approximately$310 million . The results from experimental pads in leaching process have confirmed adequate levels of copper recovery. We expect this project to start production in 2024 with an expected mine life of 13 years. The basic engineering study is finished and the Company continues developing the project and site environmental activities. Lime plant - Sonora: As part of our cost improvement projects, we are building a new lime plant with a production capacity of 600 metric tonnes per day, which will be the largest lime plant ofMexico . This facility will allow us to reduce to approximately 50% our current lime cost at our Mexican operations. The total budget for the plant is$63.1 million , of which we have spent$54.0 million as ofJune 30, 2022 . The furnace of the plant started operations in the second quarter and we expect to reach full capacity in the third quarter of 2022.
Projects in
Quebrada Honda dam expansion - Tacna: This project aims to enlarge the main and lateral dams in Quebrada Honda and includes the relocation and repowered of some facilities due to dam growth and implementation of other facilities for water recovery, among other factors. As ofJune 30, 2022 , pre-commissioning and commissioning activities are in progress with work on three fronts. This project has a total budget of$179.4 million , of which we have invested$152.9 million as ofJune 30, 2022 .Tia Maria - Arequipa: OnJuly 8, 2019 , we were granted the construction permit for this 120,000 tonne annual SX-EW copper greenfield project with a total capital budget of$1,400 million . The Government awarded the permit after completing an exhaustive review process, complying with all established regulatory requirements and addressing all observations raised. The challenges surrounding the construction permit were overcome when onOctober 30, 2019 , theMining Council of thePeruvian Ministry of Energy and Mines ratified the construction permit for the Tia Maria project. The Company has been consistently working to promote the welfare of the Islay province population. 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. We have also promoted agricultural and livestock activities in theTambo Valley and supported growth in manufacturing, fishing and tourism in Islay. In 2021, SPCC fortified its relation with the regional government and successfully overcame its opposition to project initiation. This new consensus was reflected in an agreement forSocial Investment for Taxes for projects relative to health facilities and roads. Our efforts to ensure the current and long-term welfare of the population in the area of influence of the Tia Maria project were recognized by several local associations, which sent letters to the National Government to request project initiation. We reiterate our view that the initiation of construction activities at Tia Maria will generate significant economic opportunities for the Islay province and the Arequipa region. During the construction and operation phase, we will make it a priority to hire local labor to fill the 9,000 jobs that we expect to generate duringTia Maria's construction phase. Additionally, from day one of our operations, we will generate significant contributions to revenues in the Arequipa region. The Company has made an offer to the Peruvian government to build the Paltiture dam, instead of a desalinization plant originally proposed, to provide water to both the project and the community. The dam will have a total capacity of 73 million cubic meters, of which the Company will use a maximum of 10 million cubic meters. The remaining 63 million will be for community use. The dam, if built, will require a much higher investment than the$100 million budget 46
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planned for the desalinization plant. If the offer is accepted, the Company would take the appropriate steps to make the necessary adjustments to the project plan and update the required permits for its construction. Nevertheless, we believe that by increasing the water supply, it will generate more palpable benefits for local communities. We expect the Peruvian government to continue to acknowledge the significant progress the project has made on the social front and the important contributions thatTia Maria will generate for Peru´s economy and, consequently, take the necessary steps to provide SCC with adequate support to initiate construction. This greenfield project, located inArequipa, Peru , will use state of the art SX-EW technology with the highest international environmental standards. SX-EW facilities are the most environmentally friendly in the industry due to their technical process with no emissions released into the atmosphere.
Potential projects
We have a number of other projects that we may develop in the future. We continuously evaluate new projects on the basis of our long-term corporate objectives, expected return on investment, environmental concerns, required investment and estimated production, among other considerations. All capital spending plans will continue to be reviewed and adjusted to respond to changes in the economy and market conditions.El Arco -Baja California : This is a world-class copper deposit located in the central part of theBaja California peninsula with ore reserves of over 1,230 million tonnes with an average ore grade of 0.40% and 141 million tonnes of leach material with an ore grade of 0.27%. The project includes an open-pit mine with a combined concentrator and SX-EW operations. Annual production is expected to total 190,000 tonnes of copper and 105,000 ounces of gold. The Company has started the baseline study and is reviewing the basic engineering analysis to request the 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.Los Chancas - Apurimac: This greenfield project, located in Apurimac,Peru , is a copper and molybdenum porphyry deposit. Current estimates of indicated copper mineral resources are 98 million tonnes of oxides with a copper content of 0.45% and 52 million tonnes of sulfides with a copper content of 0.59%.Los Chancas project envisions an open-pit mine with a combined operation of concentrator and SX-EW processes to produce 130,000 tonnes of copper and 7,500 tonnes of molybdenum anually. The estimated capital investment is$2,600 million and the project is expected to be in operation in 2027. In the first quarter of 2022, we continued to engage in social and environmental improvements for the local communities and we worked on the project´s environmental impact assessment. InFebruary 2022 , a group of illegal miners occupied part of the lands of the project and started to produce copper with a low scale artisan process. OnMay 31, 2022 , a group of people attacked the project mining camp, causing a fire and completely destroyed the installations. There were no fatalities to regret. As of today, these illegal miners are working in the zone. The Company expects strong action from the authorities to restore the lands to the Company so that it can continue to develop the project.Michiquillay Project - Cajamarca: InJune 2018 ,Southern Copper signed a contract and made an initial payment of$12.5 million for the acquisition of the Michiquillay project inCajamarca, Peru . InJune 2021 , the Company paid an additional$12.5 million to acquire the project. The Company has created a multidisciplinary management team to plan the development of this project. As part of this plan, the Company has established venues of contact with the local and regional authorities and communities to promote programs for the sustainable development in the area. In 2021, the Company signed Social Agreements with the Michiquillay and La Encañada communities. Additionally, inOctober 2021 thePeruvian Ministry of Energy and Mines approved the semi-detailed Environmental Impact Study for the project. At the end ofJune 2022 , the Company has all the required permits for exploration activities. These events are important steps that will allowSouthern Copper to initiate an in-depth exploration program in the third quarter of 2022.
The Social Agreements with the Michiquillay and the Encañada communities represent an opportunity to improve the quality of life of the residents of those communities via our strong social programs and backed by a solid framework for technical work at the project level. The main commitments signed by the Company in the social agreements are related
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to providing support for agricultural and livestock activities, economic development of local initiatives, and social programs in favor of education, water management, waste disposal, and healthcare for vulnerable groups.
In June, 2022, the Company notified the Peruvian authorities the end of the suspension period and the start of the pre-operational period that lasts 12 years and it can be extended for three more years. The start of the pre-operational
period does not imply a payment obligation. The Company must support an
investment of
years which includes exploration activities as well as the development of social programs.
Michiquillay is a world class mining project with inferred mineral resources of 2,288 million tonnes with an estimated copper grade of 0.43%. When developed, we expect Michiquillay to produce 225,000 tonnes of copper per year (along with by-products of molybdenum, gold and silver) for an initial mine life of more than 25 years, at a competitive cash-cost. We estimate an investment of approximately$2.5 billion will be required and expect production start-up by 2028 and that Michiquillay will become one of Peru´s largest copper mines. The project will create significant business opportunities in the Cajamarca region; generate new jobs for the local communities and contribute with taxes and royalties to the local, regional and national governments. The above information is based on estimates only. We cannot make any assurances that we will undertake any of these projects or that the information noted is accurate.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE ("ESG")
In line with best practice, the Board of Directors has approved the formation of a new Sustainability Committee chaired by an independent director. The purpose of this Committee is to support the Board of Directors ofSouthern Copper Corporation in developing and monitoring the Company's compliance with on-going commitments to the environment, health and safety, communities, human rights, and corporate governance. This is a significant step in our pledge to a robust and strong ESG performance. Quoting the Chairman of our Board of Directors in the letter that accompanies the 2021 Sustainable Development Report of our holding, Grupo Mexico: "A business model focused on responsible and transparent management in the social, economic and environmental spheres are essential to guarantee sustainable development." S&P Global has recognized SCC's sustainability efforts by including it in a new index, S&P/BVL Peru General ESG, as of April of this year. This index is the first of its kind in the Peruvian market and recognizes a total of 17 companies that meet high standards for environmental, social and governance management. In light of its improvements in the realm of ESG, S&P has also upgraded the Company's Sustainability Assessment, which rose from 50/100 points in 2020 to 61/100 in 2021 ( 22% increase). These results led to our inclusion in the Dow Jones Sustainability index for the MILA region in 2019 and we have also been included in the 2022 Sustainability Yearbook. We aim to improve our sustainability management and performance to ensure that we maintain and continuously improve our sustainability ratings. Certification of our environmental and occupational health and safety management systems allows the Company to reinforce a preventive culture that is aligned with best international practices. We continue to make progress in our quest to achieve ISO 45001 and 14001 certifications. During the second quarter of 2022, theMaritime Terminal ofGuaymas, Mexico received ISO 45001 certification and theCharcas unit inMexico became the first of our underground mines to obtain ISO 14001 certification. Given the importance of water for our operations and in the broader perspective of climate change, the Company recently appointed a Water Resources Director at the executive level, whose main function will be to coordinate the actions needed to promote water management at all our operations and ensure our place as a responsible partner in the regional management of this valuable resource. SCC seeks sustainability by managing different fronts.The Metallurgical Complex in Sonora, where we smelt and refine material mined from the region, was recognized in the ranking of the 10 Best Places to Work for Women. With this recognition, this plant has consolidated its position as the employer of choice for the best professionals in the country and has strengthened an organizational culture based on safety, predictability and employee trust. This industrial complex was also given the 2021 National Export Award in the category of Large Industrial Exporting Companies for its 48
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contribution to foreign trade and international business in the country. This distinction recognizes SCC's responsible production of essential raw materials; environmental preservation efforts; and the economic benefits and support it provides to bolster the well-being of workers and their families. InPeru , the Prime Minister joined us for the inauguration of the Cularjahuira dam ($11.5 million ), which was the fruit of joint investment between the Company, government authorities and the highland community of Camilaca. This project will help strengthen agricultural activities in the province of Candarave (near our Toquepala operations) and will be complemented by work on a new Callazas dam ($35 million ), which SCC hopes to finance through the "Social Investment for Taxes" (obras por impuestos) mechanism. These efforts are evolving in a context marked by record-highs for the Company's tax contributions to the regional governments of Moquegua and Tacna in 2021.
ACCOUNTING ESTIMATES
Our discussion and analysis of financial condition and results of operations, as well as quantitative and qualitative disclosures about market risks, are based upon our consolidated financial statements, which have been prepared in accordance withU.S. GAAP. Preparation of these consolidated financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We make our best estimate of the ultimate outcome for these items based on historical trends and other information available when the financial statements are prepared. Changes in estimates are recognized in accordance with the accounting rules for the estimate, which is typically in the period when new information becomes available to management. Areas where the nature of the estimate makes it reasonably possible that actual results could materially differ from amounts estimated include: ore reserves, revenue recognition, ore stockpiles on leach pads and related amortization, estimated impairment of assets, asset retirement obligations, determination of discount rates related to the financial lease liabilities, classification of operating leases versus financial leases, valuation allowances for deferred tax assets, unrecognized tax benefits and fair value of financial instruments. We base our estimates on historical experience and on various other assumptions that we believe reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
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