Grupo Mexico SAB de CV

BMV:GMEXICOB

Earnings Call Transcript 2020-Q1

[Operator]

Good afternoon, and thank you for holding, and welcome to Grupo México's first quarter earnings conference call. With us this afternoon is our Vice President, Mr. Xavier García de Quevedo; Mr. Fernando López Guerra; Mr. Oscar González; Ms. Marlene Finny; Mr. Francisco Zinser; and other executives, who will discuss the financial performance of the company during the quarter, giving you a summary of the latest news and address any questions you may have at the end of the call.

[Marlene de la Torre, executive]

Well, thank you. Good afternoon, and thank you for joining...

[Operator]

Okay. Before we begin, I would like to remind you that the information discussed on today's call may include forward-looking statements regarding the company's results and prospects which are subject to risks and uncertainties. Actual results may differ materially, and the company cautions not to place undue reliance on these forward-looking statements. Grupo México undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. All results are expressed in full U.S. GAAP.

[Operator Instructions]

So we will begin with Ms. Marlene Finny. Please go ahead.

[Marlene de la Torre, executive]

Thank you. Thank you so much, and good afternoon, everyone. I'm in the company with all the top executives from all of our divisions. We want to thank you for your time during today's Grupo México First Quarter Earnings Conference Call for 2020. For today's conference, we will be following a presentation that can be downloaded from our website or by accessing the webcast, which is also available on our website. So either way, you can download it or follow with us.

I would like to first hope that you and your families are safe and well in this very unusual time for everyone around the world. We wish you all the best and hope that everything goes back to normal soon. I would like to express our gratitude to everyone who is on the front-line, fighting this pandemic, including essential industry workers, such as several of our different operations. With you, we have been able to safeguard the continuity of some of our businesses that have been main essential, so please be sure that we will continue to make extraordinary efforts for our workers, their families and the communities in which we operate to stay safe and well.

We will begin now by looking at Slide #3, which is the schedule for today. I'll begin by commenting on the current situation of the COVID-19 pandemic and then going on to the finance report, main financial highlights for this quarter. Then Mr. Xavier García and Mr. Oscar González will move on to the Mining Division, commenting on the mining economic environment, Mining Division financials and highlights. After that, Mr. Fernando López, will detail the financial results and main events of the Transportation Division. And finally, Mr. Francisco Zinser will explain the relevant events of the Infrastructure Division. Then I will end with a short closing remark, and the line will be open for your questions and answers.

So now going on to the next slide, after that, that is Slide #5. We have been taking proper care since the begin -- since this started, we have been taking proper care of our personnel. That has always been the most important thing for us, our company.

While confronting this COVID-19 pandemic in the countries in which we operate, which is Mexico, Peru and the United States, we continue with essential operations in compliance with the local emergency measures. As soon as the coronavirus was declared a pandemic, we implemented very strict hygiene and sanitation protocols in all of our facilities and all of our divisions to protect the health and welfare of our employees, their families, and as I was mentioning also, the communities in which we are present.

The statements from governmental authorities has made it clear that essential economic activities must continue during this COVID-19 health emergency, and that industrial mining, which is closely linked to chemical and construction industry is essential to the requirements of electrical, hospital and medical infrastructure as well as for the manufacturing of health-related supplies and technological equipment. These industries are indispensable and strengthen the infrastructure of manufacturing, logistics and support global supply chains.

The strategic position of industrial mining as a supplier of key materials, such as steel, copper, gold, coal, silver, zinc and cement has been recognized by the United States, Canada, Mexico and Peru. These countries have confronted the COVID-19 through social distancing and stay-at-home measures and recognized that industrial mining is indispensable to avoid the interruption of supply chain of essential production to fight the pandemic.

As you can see in this Slide #5, copper is the key material for the manufacturing of specialized cables required to produce high-voltage electrical installations that supply electrical power to the communities, to hospital and supply centers. Indeed, copper is essential for the manufacturing also of other electrical components required to transmit and distribute electrical power to urban centers and to create electronic components that are also necessary for medical equipment and appliances, cell phones, computer hardware, digital data transmission, images and voice. Copper is also required on surfaces to remove viruses and bacteria, which make it -- make copper essential for the production of drinking water and ventilation and air conditioning systems.

Chemical industry with their metallurgical processes have proven to be vital in the fighting against the COVID-19 pandemic affecting the world.

Given the nature of our mining operations, and this is important to have in mind, we are highly -- the level of our maintenance in our operations is very high, and we are conducted remote locations and with mandatory use of personal safety equipment. It is easier to implement and comply with COVID-19 protective measures such as physical isolation and access control.

Industrial mining uses advanced and reliable machinery and does not require high physical concentration of employees. In many cases, workers fulfill their duties maintaining distances of more than 100 meters from their coworkers.

The company has developed very strict COVID-19 emergency protocols and only 40% of our labor force in Mexico, I'm talking this is regarding our mining operation. So only 40% of our labor force in our mining operations in Mexico, which is around 6 -- sorry, 40% of our labor force in Mexico are currently working on site under safety -- under very, very strict safety measures. So this means 60% is not working right now. More than 8 -- or almost 9,000 employees are working from home, including all the high-risk individuals due to the age or prior medical conditions.

For the Peruvian operation, roughly 30% -- or 39%, roughly 40% are working on site under very strict also safety measures, while the other 61% remains from home. So this means more than 5,000 workers are staying at home. It should also be noted that to the date, there has been no known cases of COVID-19 contagion among our employees, our mining facilities in Mexico and Peru and our operations in Mexico and Peru.

Our COVID-19 emergency protocol has been reinforced by preventive measures such as disinfecting, clinical monitoring before work, cleaning and sanitizing all of the work areas and the respectful social distancing. We have also restricted access to contractors, suppliers and nonessential personnel, and enforced multiple actions to limit workforce exposure to COVID-19, such as travel restrictions, prohibiting face-to-face meetings and urging frequent handwashing as well as adherence to all other health, safety and social distancing measures issued by governmental authorities.

From the beginning -- since the beginning of this pandemic, the company in all of the 3 divisions has been implementing very strong measures to protect the health of our workers. For this purpose, the company has approved and we have spent a little bit more of $11 million in donations for general support for the population of Mexico, Peru and the United States. You might have seen another number around MXN 135 million. This has been updated to the latest numbers of what we have been giving away as offers and the things are on it's way, the [indiscernible] is also on its way. So that way, a little bit above $11 million.

As a way to content with the pandemic, we have donated medical supplies and dozens of medical and mechanical ventilators for breathing support to hospital in the communities in which we operate.

In Sonora specifically, we have established 88 confined beds in company housing property to serve as centralized sanitary facility for people presenting symptoms of respiratory disease, who require isolation or moderate hospital care. We are also donating over 200,000 items of personal protection equipment to medical staff and 30,000 hygiene kits to our workers and to the population of our areas of influence, including general information materials about the epidemic. We have also donated cleaning and personal protection equipment to the staff, members of the National Guard in Mexico, the Peruvian police and the army.

We are helping -- in addition to all this, we are helping vulnerable individuals, such as the elderly or disabled persons and pregnant women by donating more than 30,000 kits containing food and hygiene items.

In addition to the above-mentioned efforts, we have also installed more than 200 portable sinks in strategic areas of the communities in order to reinforce preventing the -- preventive handwashing. And moreover, to endorse the stay-at-home measure, we have offered over 350 sports, cultural and educational workshops online. And over 58,000 virtual instructive activities have been watched by a lot students from schools sponsored by our company. Additional to this, through our community care service, we have offered free medical, psychological and employee counseling 24 hours a day.

After this, we are moving ahead to Slide #7. This is everything we have been doing, and we will continue to do everything that we can in the operation and fight against this pandemic and taking care of our workers.

On Slide #7, we show our operations update in the Mining Division. I already went into these numbers, which is the 40% working in Mexico, the 39% working in Peru. In Arizona, our Transportation Division continued as an essential economic activity, so we continue to operate. We are -- must continue operating while complying with this more restrictive measures in terms of hygiene and all the protocol, so we'll continue with this.

And our Infrastructure Division, most of our businesses are considered as essential industry, so we will continue to operate with the highest adherence on care of the hygiene and other protocols that have been given by the local authorities and the health organization.

Moving on to Slide #8, the slide -- the next one. Here, we show Grupo México's consolidated financial highlights. First off, I'd like to say that given this financial -- well, given this situation, the financial strength and the competitiveness of our organization, we have no doubt that we will be able to endure this crisis. We have a very solid balance sheet, comfortable debt maturity, liquidity and a solid cash generation that will help us through this challenge.

Moving to the numbers. Sales for the quarter totaled $2.45 billion, a 3.3% lower than during last year in the first quarter of 2019. And this is given lower copper prices and metal prices, in general. So zinc prices were 21% down; copper prices, a little bit more than 9% down; and molybdenum prices, a little bit above 18% down. So EBITDA for the first quarter totaled a little bit -- almost $1.1 billion, which is 12% lower compared to the same quarter last year.

Despite the sound cash flow generation and the positive results for the quarter and the strong balance sheet that we maintain in Grupo México, during this period of uncertainty given the global pandemic of the COVID-19 virus, during April 24, last Friday, the Management Board has decided -- ready to cut the dividend by 50% in this quarter to remain cautious in case of any challenges or uncertainty, given everything that's happening. So our dividend of MXN 0.40 per share has been approved. This dividend translates into a 3.6% dividend yield. For future dividend approval and distribution, we will continue to evaluate the situation in line with current economic conditions and the development of the pandemic, and that we will decide in further Board meeting, what will happen to the next dividends and dividend distribution.

In the Mining Division, we are happy to reaffirm, and this is something that gives us a lot of strength also for our balance sheet during this time. We are very proud to reaffirm our position as the lowest cash cost producer in the industry worldwide. We've significantly lower net of byproduct cash cost of $93 (sic) [ $0.93 ] per pound. It is a 17% decrease year-over-year. And we also have the largest copper reserves worldwide and fully integrated operations.

Production during the first quarter was an increase of 4.3% year-over-year due to our Toquepala expansion and better ore grade as well as our recovery in Cuajone.

Slide #9, so the next one, shows the main quarter highlights for the 3 divisions, starting with the Mining Division. In our Peruvian operations, we were able to continue operating, which has been a great effort from our Peruvian team. In these operations, we expect marginal impact in production. We mentioned our significantly lower cash cost after byproduct as 17% lower for the first quarter. Our moly production increased almost 40% due to higher production.

In GMXT, our Transportation Division, EBITDA grew over 13%, which is a great accomplishment for this division, who was also able to reduce the cost of sales by 6%. Volume increased almost 7% in tons kilometers, leading to an increase of 7% in volume. The division also posted improvement in operating metrics, including 13.4% reduction in dwell time, which enables us to move a greater load with fewer trains and cars, freeing railway capacity.

Our Infrastructure Division's EBITDA increased 24% due to an additional rig in operation and better operating efficiencies. Net income increased due to the reasons stated before and a positive impact of the exchange rate in our pesos-denominated debt. Our new wind farm, which has an installed capacity of 168 megawatts, will supply clean energy to different industries, reducing our CO2 emissions, equivalent to taking roughly 60,000 cars off the road. This project has a 27% progress, and we expect to be fully operational by 2021. We will go into further details of our different divisions afterwards. So I will let Xavier talk about all the details of the different divisions.

So going on to Slide #10, and to the details of payments as a part of Grupo México, we -- as I mentioned before, we maintained a very solid balance sheet. So you can see our balance sheet. We've shown strong capital structure and generated value. We have our net debt-to-EBITDA ratio of 1.4 with 85% of our debt in dollars. So this is matched with our revenues as well. So as you know, in our mining operations, we have 100% of our revenues in pesos.

In our Transportation Division, roughly 50% of our revenue is in pesos and around that in the Infrastructure Division as well. So this is matched with our revenues. And 96% of our debt has a fixed rate. I have already mentioned the dividend in the beginning of the presentation, which is a MXN 0.40 per share for the quarter, remaining cautious of the current situation.

On next slide, #11, we will show debt maturity profile with low significant maturities until 2035. So the maturity is being -- they see right now in 2020, which were $400 million for the Mining Division. We already paid at the beginning of April. So this is no longer payable. And the next big one is until 2035.

Reflecting on the quarter, I think Grupo México has proved once again to be a strong defensive and solid company, and we have no doubt that we will be able to overcome the current pandemic challenge.

Again, our thoughts go out to everybody around the world who's helping fight this pandemic and wishing you and our families to stay safe.

Now I will pass the call to Mr. Xavier García de Quevedo and Mr. Oscar González. They will together comment on the Mining Division highlights.

[Xavier García de Quevedo Topete, executive]

Thank you, Marlene. Hello, everyone.

[Marlene de la Torre, executive]

I cannot hear you very well.

[Xavier García de Quevedo Topete, executive]

Can you hear me now?

[Marlene de la Torre, executive]

Yes. Yes. Now we can hear you clearly.

[Xavier García de Quevedo Topete, executive]

Okay. Thank you, Marlene. Hello, everyone. First, I hope you all are well and safe at home as well as your families.

Moving to Slide 13. Sales totaled $1.79 billion in first quarter, 63% lower than first quarter last year due to significant reduction in metal prices: copper, 9.2%; moly, 18.1%; zinc, 21.3%, which was partially offset by production increases: copper, 4.3%; zinc, 3.8%; and moly, 39.7%.

EBITDA totaled $700 million, a 23.1% decrease compared to the same quarter a year ago. Production totaled 600 -- sorry, 272,646 tons, a 4.3% increase versus first quarter. In Peru, production grew 79% during the first quarter due to our new Toquepala concentrator and a better mineral ore grade as well as the recovery in our Cuajone mine. This countered the 1.4% drop in production in Mexico, mainly Buenavista, resulting from lower ore grades in these mines. In the U.S., production declined 4% due to temporary shutdown resulting from the labor situation at the Hayden concentrator, Hayden and Amarillo operations.

I am glad to say that we reiterate our first place as the company with the lowest cash cost in the industry at $0.93 per pound of copper after byproducts, with a reduction of a little over 17% for the previous quarter. We are also market-first in copper reserves.

Moving on to Slide 14. We show our short-term production profile for you to use as a reference. I'd like to say that as the situation advance, we will continue to develop these 3 projects as timely as possible. For now, we only expect them to delay of the -- at the most for a few quarters due to the pandemic situation. If you have any specific question, we can address them during the Q&A session. Within the 3 of them, we will increase our copper production by 90,000 tons during the next 4 years and our zinc production for 80,000 tons. These 3 projects remain attractive to the company and an important organic growth driver.

I would like to quickly comment on our Asarco operations. Due to the strike, the Hayden concentration (sic) [ concentrator ] and smelter units as well as the Amarillo refinery will remain temporarily shutdown. It's unknown, in fact, as when they will [indiscernible] in operation. The remaining units, Mission, Silver Bell and Ray are operating at full capacity, given the workers' individual decision to continue working and some new hires. As a result of the Asarco unions' decision to go on strike, for this year, we expect copper production to reach 120,000 tons, in line with 2019, with a reduction of $100 million in operating and administrative costs to reach a cost per pound of copper of around $2. I'd like to reiterate our commitment to continue working to guarantee a long-term sustainable operation that will generate greater value for our shareholders as well as our commitment to the economies of Arizona and Texas through competitive jobs and direct participation with the local communities.

For this year, we expect a guidance of [ 1,112,000 ] tons of copper production for the Mining Division and 9,886,000 tons of sales in copper. This guidance is subject to update due to current uncertainty, but we will continue to keep you posted on longer-term projects and the COVID-19 situation develops.

I would like to close reflecting on the current pandemic situation and extending our full support to the communities for where we operate and all of our collaborators. I hope all of you and you families stay safe during this unusual time.

I will now pass the call on to Fernando López Guerra, who will comment on the Transportation Division. Thank you.

[Fernando Guerra, executive]

Thank you, Xavier. Can you hear me?

[Xavier García de Quevedo Topete, executive]

Sure.

[Marlene de la Torre, executive]

Yes, Fernando, perfectly. Yes.

[Fernando Guerra, executive]

Thank you. My thoughts go out to you and all of your families. I hope everybody is staying at home, if you can and keeping -- and being safe. I'd like to start by saying that we're committed to our customers in the countries where we operate. GMXT has made extraordinary efforts to safeguard our operations, taking care of our employees' health. We are an essential economic activity, thus we must continue operating while being responsible of our workers' health. We have implemented all the WHO recommendations in our facilities, sending all admin personnel to work from home as well as vulnerable employees. We're maintaining essential workforce -- we're maintaining an essential workforce in the operations who must comply with protection and the strictest hygiene measures.

Moving on to quarterly results on Slide 16. I am glad to say GMXT reported a solid first quarter 2020, showing growth in transported volumes, improvements in its operating metrics and an increase in its financial indicators.

Our total revenues reached $606 million, which translates into a 7% increase versus first quarter '19, mainly driven by the chemical, agricultural and cement segments. I will comment quickly on each one of those.

On Chemicals, we -- Chemicals showed an accrued growth of 28% in revenue, 9% in net ton kilometers and 10% in carloads during the first quarter. This is a result of the increase in import volumes. We're gaining market share from over-the-road as well as the growth in domestic traffics.

On the Agricultural segment, we have accrued a figure for the first quarter of 27% increase in revenues, 13% in net ton kilometers, 8% in carloads. This is thanks to a greater carrousel imports and an improvement in the market share into the center of the country.

In the Cement segment, we have an accrued growth of 16% in revenue, 13% in ton kilometers, 12% in carloads. This is also a conversion from over-the-road to railroad transportation. Bear in mind that the country has not been growing for the past quarters. The growth that we have is also gaining -- again, it's all gaining share versus truck and over-the-road.

For the fourth quarter '19, sales reached $627 million, $2.4 million higher than fourth quarter -- I'm sorry. I'm also proud to announce we achieved $281 million EBITDA, over 13% higher than first quarter '19 due to operating improvements and a 46.4% margin. This is 270 basis points above first quarter of '19. Sales of cost -- sale cost decreased 6%, volumes were up 6.6% in ton kilometers, and net income was up 34% due to a hike in revenues, operating efficiencies reflected in operating cost reductions and the improvement of our cost of capital, resulting from the refinancing of 2 loans with banking institutions in September 2019 through the issuance of local bonds.

The main highlights for the Transportation Division are shown on Slide 17, including some that I have mentioned already about the EBITDA increase and margin expansion. I would also like to comment on our operating margin reaching -- that reached 48.3%.

Moving on to the solid operation metrics, we achieved for the quarter, a train length that remain in line with first quarter of '19. This is almost at 1,800 meters. We did not grow significantly in this metric for we had to maintain the service level -- we had to continue running trains. And on the other end, we put out some slow orders in order to protect and to diminish the amount of accidents. We're giving more space for the gangs to go out and work on the track and then fix the track. And so we are -- I think we are, couldn't put in general, we are giving more ways, safety, we're giving priority to safety, rather than speed. Therefore, our speed has remained also in line.

On tons, we have increased 2.3% to 6,000 tons per train. We managed to reduce to all-time in our yards by 13%, which also considerably improves our service and allow -- this allows us to transport greater loads with fewer trains and railcars. We're saving crews and freeing of the overall railway and terminal capacity to continue to improve our speed. We are giving you more detail on our 11:00 conference call, but I just wanted to mention that we will continue to aim for ongoing improvement in these indicators through constant efforts to improve the quality of our service.

Unfortunately, during the quarter, we had to face some external challenges that impacted volume as we had blockades in the state of Puebla, this is the route that goes into Veracruz. And also, we had a decrease in demand for coal and coal prices and demand for moving coal into the Asia Pacific region, which also deteriorated our volumes in the energy sector.

Commenting on the current COVID-19 pandemic, we have acted in a fast and efficient manner to ensure uninterrupted operations in Mexico and the U.S., and we will continue to do so.

Going on to Slide 18. As you can see, several segments showed an increase in revenue during the quarter, led by the Chemicals segment explained already before. And the rest of the segments, I think I already mentioned on the one that we -- has been impacted more severely because of COVID-19 has been automotive as all of the auto facilities in Mexico are now closed. There is a significant pressure from the U.S. government to open up the supply chain between Mexico, U.S. and Canada, so that we expect this to come back online soon. However, bear in mind, automotive is not more than 10% of our revenue. We continued to gain market share on other segments, and this has -- this is what has allowed us to grow through the first quarter at 7% with a GDP that's practically flat.

Going into Page 19, our Board authorized a record investment plan for $466 million. However, we have reduced this line -- this plan by 13%, down to $406 million.

Maintenance, which is our main area of investment, we have kept it the same. We are taking advantage that volumes are a bit soft so that we can have our crews, our gangs out there working. This is a paradise for us, for the track team because they are able to work as fast and they don't have to interrupt as often. So we're working very hard on our track maintenance and so on.

On efficiencies, we diminished it from $98 million to $78 million. Our growth projects are -- we are sending them into the future, some of them. But if we find some projects that can accelerate conversion from over-the-road and truck into rail, we will do so and recommend the Board that we go forward on that.

On strategic, we lowered that from $66 million to $60 million, and that's practically how it ends up.

Thank you, everyone. This is all we have from the Transportation Division. I hope you stay safe and well.

I'm passing the call on to Francisco Zinser, who will comment on the Infra Division.

[Francisco Gonzalez, executive]

Thank you very much, Fernando. Can you hear me well?

[Marlene de la Torre, executive]

Yes, Francisco.

[Fernando Guerra, executive]

Yes.

[Marlene de la Torre, executive]

We can hear you, yes.

[Francisco Gonzalez, executive]

Okay. Thank you. Good afternoon, everyone. I'm also sending out my thoughts to you and your families to remain safe during this pandemic.

So starting with the financial highlights of the Infrastructure Division, on Slide #21. Net revenues totaled $136 million, a 5.5% decline versus the first quarter of last year due to lower income from the Energy Division, mostly because gas prices decreased significantly, 51% compared to last year, and the construction business.

We posted a strong EBITDA growth of 24% in the Infrastructure Division versus the first quarter of last year, mostly due to having an additional rig in operation, Zacatecas, and better operational efficiencies in all of our rigs. Net income also increased sevenfold because of the same reasons plus a positive impact that we've had on the FX in our pesos-denominated debt.

Moving on to Slide #22, commenting on the Energy Division. First quarter '20 EBITDA increased to $36 million -- reached, sorry, $36 million with a 64.4% margin. There was a 1.4% increase in energy generation totaling 885 gigawatt hours versus 873 gigawatt hours for the same quarter of last year.

In the Salamanca-Leon highway operation, during the first quarter, revenues totaled $10 million. EBITDA was 1.5% lower, reaching almost $8 million. And traffic showed a 1.3% decrease versus the first quarter due to the -- to lower traffic because of the sanitary contingency.

Moving on to the PEMSA division to oil rigs. We ended the quarter with 6 oil rigs in operation and an average efficiency of over 99%. Sales were up 29% versus last year, and EBITDA reached $48 million, a 33% increase versus the previous year.

Before closing, I'd like to say that we are looking forward to our new wind farm, which will produce 168 megawatts, as Marlene mentioned in the general highlights. We expect it to be fully operational by 2021. Also, our fuel storage terminal business, with the first 2 terminals in Monterrey and Guadalajara, will have a combined capacity of more than 1.3 million barrels, and those are expected to come online in 2022.

Thank you very much, everyone, for your time. I'll now pass it on for -- to Marlene for her closing remarks.

[Marlene de la Torre, executive]

Thank you, Francisco, Fernando, Xavier and everybody. As we all have mentioned, we hope that you are well and keep staying safe at home. And now we will open the session for the Q&A, and thank you for your time today.

[Operator]

[Operator Instructions] And our first question is from Alfonso Salazar with Scotiabank.

[Alfonso Salazar, analyst]

I hope also that your families stay safe in this COVID situation. I have 2 follow-up questions from the previous calls. The first one is regarding the mining operations in Mexico, in particular. I understand that negotiations through Mexico's mining chamber, Camimex, to consider the mining activity as essential weren't successful. So the first one that I have is that if the negotiations now take place on a mine-per-mine basis, and I imagine only for those activities that are considered essential by the government, I mean, just to say, I don't know if you can provide some color on what activities are not considered essential and if you can assess production going forward? Just to mention one, I don't know if blasting is considered an essential activity, and eventually, without blasting, that would reduce output from your mine. So if you can provide some color on that, it would be very helpful to understand what's happening in Mexico and what level of production we can expect going forward.

The second question is regarding the rail division. In the previous conference call, I understand that volumes in April were down 10%, but the revenue has been flat. So I think that's in 12%. And the question I have is regarding the impact of lower diesel cost on pricing. I don't know if you can remind us how the pricing of copper incorporates the changes in fuel cost? And what should we anticipate for margins in Q2 at this division? Those are the 2 questions I've had.

[Xavier García de Quevedo Topete, executive]

Thank you, Alfonso. This is Xavier. I will answer your first question. First of all, I can tell you, as we mentioned, we have presented to the -- to our government all the protocols that we are following in the different metallurgical mines in which we are operating. As well, we have reduced more than 60% of our workforce to -- just to operate on what is essential. Also having -- taking into consideration that many of our metallurgical operations are considered part of the chemical industry, we are following this pattern. As we -- as you know, copper is essential for many things, and that's what we have followed. That's what we are doing, reducing, of course, all the construction work and all -- and postponing many of the activities.

[Alfonso Salazar, analyst]

Okay. But I think -- and regarding -- at this point, it's difficult to assess, I imagine, the impact on production cost. You don't expect that it's impacted by -- considering the guidance that you provided for the year in terms of production, this shouldn't be material. Is that right?

[Xavier García de Quevedo Topete, executive]

Yes. We expect probably to have some impact in production. I mentioned before probably 7,000 tons for the Mining Division and about only 4,000 tons for Southern Copper.

[Operator]

[Operator Instructions]

[Marlene de la Torre, executive]

And the other question, Alfonso, was mentioning was regarding the Transportation Division.

[Fernando Guerra, executive]

Which I did not get at all. So could you please repeat it?

[Alfonso Salazar, analyst]

Yes. All right. Can you hear me, Fernando? Yes?

[Fernando Guerra, executive]

Yes, but not very clearly. So please be very concrete and specific.

[Alfonso Salazar, analyst]

Okay. The question is regarding if you can remind us how the pricing structure incorporates changes in fuel cost?

[Fernando Guerra, executive]

How and what? I'm sorry.

[Alfonso Salazar, analyst]

If you can remind us, how did you incorporate the changes in fuel cost on your pricing structure?

[Fernando Guerra, executive]

Yes. We -- sorry, I got it now. We made a pass-through about -- and was this very last year. And the pass-through consisted on an adjustment, an automatic adjustment of the fuel surcharge that we're charging for all of our users, and that rounded about 7%. So that's basically it now. So almost all the contracts are under this. Practically everybody now is under this. It took us a while to get everybody on board and the like. Everybody is there. So what you see is before we adjusted the EBITDA because of the tax credit we have. And now it's directly above the line, and it's no longer adjusted, so it's coming in as revenue.

[Operator]

Our next question comes from Carlos De Alba with Morgan Stanley.

[Carlos de Alba, analyst]

I hope everyone is doing well, and your family is doing well. Just maybe for Francisco, a couple of questions, Francisco. Do you see any impact of the lower oil price on the PEMSA division business? And going forward, what are the terms of the contracts to the extent that you can comment between the company and PEMEX?

Also, could you mention what is -- what sort of pricing terms around the new oil -- wind park or wind farm park will have with the Mining Division when it is up and running and providing energy to the mines?

And then finally, Marlene, if I may ask you about the debt of the Infrastructure Division that is coming due this year. What are the plans there from -- if I remember correctly, it's around 300 million tons, maybe slightly less. What are the plans there in the Infrastructure Division? Do you pay it out of the cash balance that you have? Or do you expect to maybe roll it over or get another financing?

[Francisco Gonzalez, executive]

Thank you, Carlos. This is Francisco. I will answer your first 2 questions.

So regarding PEMSA and the oil, the rig division. So far, we continue to collect from PEMEX regularly. So we haven't seen any issue there. We actually -- the amount that we currently have as working capital with them is actually low. So we continue to collect. Obviously, you know that the prices of oil are very, very low, and there might be some conversations with them for the future. But for now, we continue to collect. As you know, for the president, it is very, very important to continue with PEMEX plants, and we are a strategic partner to continue working with them. And we will keep you posted. But so far, we will continue business as usual.

Regarding your second question about the pricing of the wind farm, which we'll be selling electricity to the underground mine, we actually ran a competitive process last year with different companies that participated for these PPAs, power purchase agreements. And we were the ones who were able to be the most competitive, and it will be around $0.06 per kilowatt hour.

And then the third question, I'm not sure, I think it was for you, Marlene.

[Marlene de la Torre, executive]

I think it was for both of us because it's regarding infrastructure debt. So maybe if you want to go ahead on this one as well.

[Francisco Gonzalez, executive]

Yes, I can answer it. So yes, we have some debt that is coming due this year. However, that debt, which is associated to 2 oil rigs, those 2 oil rigs, we are now in conversations with PEMEX to extend the works. So we would be there for a longer period of time. And as soon as we close that, we would be able to continue -- or to refinance that part as long as we have that contract repayment. So we are working on that.

[Operator]

Our next question comes from Jon Brandt with HSBC.

[Jonathan Brandt, analyst]

I just wanted to get a little bit more of an update on Asarco. The 120,000 tons that you're expecting in production this year, what does that assume in terms of the labor disruptions and the units that are shut? Is that assuming that those come back online in the next month or 2? Or is it assuming that they're off-line for the rest of the year? If you could provide a little bit more color around the assumptions that go into that 120,000-ton figure.

And then secondly, on the dividend, how stable do you think this is? I mean if we assume commodity prices, there's no rebound and no deterioration, but they stay at this level. I know that there's a lot of projects and CapEx that you have to be doing for the next couple of years. But do you think you could keep the dividend relatively stable around the $0.40 and continue to spend on the upcoming projects assuming commodity prices remain kind of stable at these levels?

[Oscar González Rocha, executive]

Jon, regarding the first question, the production of 120,000 tons, it's just operating as we have been operating currently. So there's no additional facilities going into operations. Of course, all this is depending on the situation right now with the COVID-19 pandemic. But that's what we believe we're going to produce the rest of the year.

[Marlene de la Torre, executive]

On your second question, Jon, I think it was regarding dividends and what will happen with dividend. I think it was a very difficult question to answer because we don't know what's going to happen for sure. And as you know and you can see, during this quarter, we had below $1 cash cost. So even at these copper prices, we are still in a very strong position, but it depends on how you can continue to evolve regarding the sanitary contingency, regarding operations and regarding economic environment. So that's why we will continue to revise our dividend policy and our next dividends over the next calls as we have more visibility on how everything is evolving. So giving you right now a number or assuring you we can continue to give you this $0.40, yes, now we should. But let's see how is it going to evolve. So there's a lot of uncertainty right now, and this is something we have never faced before. So we're trying to do our best.

And I know you had another question that I forgot.

[Jonathan Brandt, analyst]

Yes. I mean it's just a quick follow-up. I mean how would you look at share buybacks versus dividends going forward just given the share price reaction? I mean is that something that you would consider share buybacks instead of dividends? Or are you committed to cash dividends first?

[Marlene de la Torre, executive]

Not necessarily. Normally, and as you know, over the past many, many years, we have serious track record of giving dividends constantly every quarter. So normally, our Board has a preference. And because of price normally -- the Mexico prices were much better actually than we thought that giving you, our shareholders, a cash dividend, so we can invest more as we want towards a very good -- where we're giving back value. Right now, at these levels, we consider buybacks, which don't make sense. We have seen that the size of the stock that we've at our local medical stock as we think, it does not reflect the value of our company and all that we sell. So we might consider that as well if that's something we will have to revise in our next quarterly meeting in June to July.

[Operator]

Our next question is from Thiago Ojea with Goldman Sachs.

[Thiago Ojea, analyst]

I would just like to follow up on the capital allocation. How are you considering capital allocation for this year and for the next maybe 2, 3 years? If you can provide a little bit more than that is being processed. I know that Marlene just mentioned the dividend that is hard to consider. But what is the way that you are considering now given the situation that we are living on?

And specifically, on the Mexican operation, our understanding is that you can still continue to mine, but you cannot process the waste. So how long could you go on, on these procedures? And do you need to shut down because you don't have workers to pile up the waste?

[Marlene de la Torre, executive]

Xavier, do you want to answer the questions on Mexican operations?

[Xavier García de Quevedo Topete, executive]

Yes. We are -- actually, we're mining some of the waste. Yes, we can continue operating, let's say, probably with a value big -- of high cost. But we can continue operating, let's say, for a year, not probably to continue operating.

[Marlene de la Torre, executive]

And sorry, Thiago, your question regarding dividend -- sorry?

[Thiago Ojea, analyst]

Sorry. So if I may...

[Raul Jacob, executive]

Yes. This is Raul.

[Marlene de la Torre, executive]

Yes, Raul, go ahead.

[Raul Jacob, executive]

Yes. I think that we're assuming some of the work at the mining operations as part of complying with the requirements of the authorities. But as soon as we have more clarity in Mexico and Peru, we will prepare a plan for catching up. As Mr. García de Quevedo indicated, we're comfortable with how we are now, but eventually, we will need to do some catching up on stripping and leaching production. So that will be informed to the market whenever we are doing that.

[Thiago Ojea, analyst]

Okay. So just a follow-up for Raul. What is the which -- the waste, now you are still processing the waste from them because I thought that you were not allowed to process the waste. So you can continue to process the waste. That's correct, right?

[Raul Jacob, executive]

Sorry, I couldn't copy you well, Thiago.

[Thiago Ojea, analyst]

No. I just wanted to confirm that your mining operations, you are also able to process the waste because my initial understanding was that you could mine the ore from the ground, but you could not process the waste, and I thought that it would be a limitation for that.

[Raul Jacob, executive]

Well, right now, as I mentioned at the Southern Copper's conference call, we're mining basically and postponing stripping as well as leaching material for now.

[Oscar González Rocha, executive]

But Thiago, it's an issue of the manpower that we have available to do the movement, not an issue of specific restrictions. Especially in Peru, you can mine anything. But the issue is that with the social distancing and the people that we have to send home because of the prescriptions, prescripting...

[Raul Jacob, executive]

Health matters.

[Oscar González Rocha, executive]

Health reasons and the age, then we have less people to move waste and leach.

[Thiago Ojea, analyst]

Okay. And the same is for Mexico, right?

[Oscar González Rocha, executive]

Yes.

[Raul Jacob, executive]

Yes, that's correct.

[Operator]

Our next question comes from Timna Tanners from Bank of America.

[Timna Tanners, analyst]

And I want to echo everyone's well wishes. I just had one question at a high level that I was hoping for some clarity on. Could you just comment a little bit on the risk or how you're thinking about further taxes to the Mexican government in light of the challenging economic environment, reduced revenues to the government? Has that been something that's come up? Or do you think it could be an issue?

[Marlene de la Torre, executive]

I will answer the question regarding clarity question. Xavier will answer it. Xavier, I'm sorry I didn't get it.

[Xavier García de Quevedo Topete, executive]

Would you want to answer this, Marlene? Would you want that I answer it?

[Marlene de la Torre, executive]

Well, go ahead. Go ahead now. Thank you.

[Xavier García de Quevedo Topete, executive]

The question of Mexico has declared not to put additional taxes. So we don't expect that. No, no more royalties or no more taxes on revenues.

[Timna Tanners, analyst]

Okay. So that's not a risk.

[Operator]

Our next question comes from Jean Bruny with BBVA.

[Jean Baptiste Bruny, analyst]

I hope you all are safe and sound. Just a doubt, I couldn't read something about profitability in that direction. What do you expect that in terms of production for Grupo México this year? I think I understood 1.12 million tons, just to confirm. And the question was broadly what the scenario would be your expectation in terms of cash cost for Grupo México for the full year?

[Marlene de la Torre, executive]

[indiscernible]

[Xavier García de Quevedo Topete, executive]

To confirm, of course, the cash -- the production will be 1,112,000 tons of copper for Grupo México. And we believe, because, of course, diesel cost is going down and because of the exchange rate that we will be able, let's say, to keep the $0.93 of operating cash cost that we have up in the first quarter.

[Operator]

Our next question is from Rodrigo Garcilazo with GBM.

[Rodrigo Garcilazo, analyst]

Just a quick question regarding Asarco is, how does Asarco's cash costs will progress throughout the year to reach the $2 per ton target you mentioned? Since it seems this quarter, its cash costs remained above copper prices. So how does this cash cost in Asarco will evolve throughout the year to reach $2?

[Xavier García de Quevedo Topete, executive]

Rodrigo, we have planned to -- minimum to keep this cost. As you know, Asarco cash costs are coming down from close to $3 to $2. And we believe we can keep this cost for this year with the savings that we are doing and synergies that we are having between Mexico and Asarco.

[Rodrigo Garcilazo, analyst]

Okay. Another way to put this is it seems that AMC generated less EBITDA than Southern Copper. Is that right? So Asarco lost money this quarter?

[Oscar González Rocha, executive]

Yes. There was a mark-to-market adjustment on inventory that we had. So there was an EBITDA effect on the quarter. But the breakeven was $2 in the quarter. So that's what Mr. García de Quevedo was referring, that we're going to try to keep that breakeven at the $2 that we had in the first quarter.

[Marlene de la Torre, executive]

Yes. This is Marlene. Sorry, just to add up to what Oscar and Mr. Xavier were saying, this is -- during the quarter, we had a decrease of almost 20% in our cash costs in our Asarco operations. So yes, we had that adjustment of inventories, but the cash cost is really going down by actually 20%.

[Operator]

And our next question is from Isabella Vasconcelos with Bradesco.

[Isabella Vasconcelos, analyst]

I just have a quick one, and I'm sorry if I missed this. But on the rail division, you mentioned, of course, that the automotive sector has been severely impacted by COVID-19 containment measures. But could you comment a little bit on what other sectors that you're seeing great impact in terms of volume in the second quarter?

[Marlene de la Torre, executive]

This is regarding the rail division, Isabella?

[Isabella Vasconcelos, analyst]

Yes, yes. Yes, that's rail division, yes. I mean if you have an estimate of the impact you have ongoing for the second quarter, it would be very helpful as well.

[Fernando Guerra, executive]

Okay. Just we'll check with Marlene. We're not listening very -- we can't hear you very well.

[Marlene de la Torre, executive]

Yes. That's regarding which will be the most affected, and correct me if I'm wrong, Isabella. But on the rail division, what are going to be the segments that are going to be more -- most affected by this contingency?

[Fernando Guerra, executive]

COVID-19?

[Marlene de la Torre, executive]

Yes.

[Fernando Guerra, executive]

Okay. Perfect. The most affected, of course, is automotive. The plants are completely shut down. We don't see them shut down for the remainder of the year, but we will -- we probably will see them shut down for another month or so.

As I mentioned before, there's a lot of pressure from the automakers and the U.S. government to open up all the supply chain regarding certain essentials for the U.S. And they are pressing specifically for the auto industry as well, also for some other finished goods that end inside our industrial products. So automotive is number one.

Industrials, yes. But there, we are offsetting with gaining -- with us gaining market share as well. And the same for construction, which ends up under cement and metals. We're doing our best to offset these with new volumes and gaining share from over-the-road from trucks. And -- but the only segments where we cannot go and get more market share is automotive. So there, the hit is 100%. But bear in mind, this is not more than 10% of our revenue.

[Operator]

And I'm not showing any further questions in the queue, sir.

[Marlene de la Torre, executive]

Well, then thank you, everybody, for joining us today. We will keep in touch. If there is anything important or any new development, we will let you know, so you can have the latest information in all of our different divisions. So we will be in touch and giving you the latest information regarding how everything is evolving. Anything you might need, please let us know. Hope you have a good day, and stay safe. Thank you so much.

[Xavier García de Quevedo Topete, executive]

Thank you.

[Operator]

And with that, ladies and gentlemen, thank you for participating in today's program. You may now disconnect. Have a wonderful day.