Grupo Mexico SAB de CV

BMV:GMEXICOB

Earnings Call Transcript 2019-Q2

[Operator]

Good afternoon, and thank you for holding, and welcome to Grupo México's second quarter earnings conference call. With us this afternoon is our Vice President (sic) [ Vice Chairman ], Mr. Xavier Garcia 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 might have at the end of the call.

Before we begin, I would like to remind you that 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]

Now I will pass the call on to Ms. Marlene Finny.

[Marlene de la Torre, executive]

Hi. Good afternoon, everyone, and thank you for joining us today for Grupo México's Second Quarter Earnings Conference Call. Here with me are all the top executives from all of our major subsidiaries and our Vice President, Mr. Xavier Garcia de Quevedo, Vice President of -- Vice Chairman of the Board actually. I would like to remind that for today's conference, we are going to be following a presentation. You can download the presentation in our website or you can access the webcast if you prefer. We will be following either of them, it's the same.

So first, on today's conference call, we are going to follow the next schedule. I will first quickly comment on Grupo México's main financial highlights. Then Mr. Xavier Garcia de Quevedo will be commenting on the mining economic environment and main highlights and financial highlights of our Mining Division. Fernando López Guerra will then explain the financial results of our Transportation Division. And finally, Mr. Mario Chavez will comment on the main highlights of the Infrastructure Division. We will then open the call for questions and answers.

Turning on to Slide #5. You can see our quarterly results, which we'll be updating in a minute. I would like to highlight that committed to our shareholders, we were able to maintain our dividend for 5 quarters in a row, so the $0.80 per share dividend for 5 quarters. At this time, the company Board approved another $0.80 -- another dividend payment of $0.80 per share, and this translates into a 7.3% dividend yield approximately.

In addition, we continue to invest in the future and to deliver great performance, sustainable growth and superior value. As you know, we have the largest reserves of copper, and we operate in high-quality, world-class assets in investment-grade countries such as Mexico, Peru, the U.S. and Spain. We are currently developing our next stage of growth in our Mining Division and across -- in all of our divisions, specifically for our Mining Division, with a program that aims to reach a copper production capacity of around 2 million tons by 2027 with a very competitive cash cost. It is important to know and to highlight that we once again have the lowest cash cost in the industry worldwide with USD 1.02 per pound of copper. So that's a development. And in all of our projects and our growth projects, we also take into consideration the importance of keep on reducing our cash cost going forward.

Our Transportation Division continues to grow strongly and to focus on efficiencies and productivity with the implementation of the new Service Master Plan aligned with precision schedule railroad that began during the last quarter of 2018. Given the growth and development of Mexico, we're expecting the railway transportation sector to continue to grow, and we keep on doing some investments and very important, significant growth projects that Fernando will address afterwards.

On the Infrastructure Division, we will be speaking as well of various existing projects that we'll be deploying in the next coming years. So investments during 2019 or the first half of -- during -- before 2019, I expected to approximate over $2.5 billion. This is committed with our company in the countries in which we operate. As a result, we expect an increased annual production of around 12% of our copper products.

In our Mining Division, we continue to confirm ourselves as the lowest cash cost producer in the industry, as I mentioned before. We are very happy to announce, and this is very relevant, that we obtained the construction license in our Tia Maria project that we allot $1.4 billion for investments and an annual production of 120,000 tons of copper that we expect to begin by 2022. We are also proud to announce an approved capital expenditure of about $400 million for the construction of the new concentrator to project 80,000 tons of zinc concentrates in Sonora. This is our Buenavista Zinc project.

In addition to that, during the first half of 2019, we were able to reach full capacity at our new concentrator in Toquepala. This is the investment we were doing over the past years, the new concentrator with a capacity of 100,000 tons of additional production, and we invested roughly $1.3 billion. And we expect that we'll recover production in our San Martin mine over -- at the end of this year and the beginning of next year. So Mr. Xavier Garcia de Quevedo will discuss the details in a minute.

Following the Transportation Division, I will -- we are glad to announce the yard and the bypass in Monterrey and also the Celaya bypass construction that Mr. Fernando will be giving you further details. So I'm going to go onto our financial highlights in Page #6.

Our total revenues were $2.7 billion. This is a 2% increase versus last year. This comes mainly from an increase of 16% of production of copper that even though with the decrease in copper prices, we still had an improvement in our Mining Division numbers, and Xavier certainly will comment on our Transportation Division as well.

EBITDA was in line with second quarter of 2018, reaching $1.3 billion, and this is despite copper prices falling 11% during the same period. Our net profit was $439 million. This is 4.5% lower than the second quarter of 2018 given an increase of depreciation due to the new financial leasing accounting standard of IFRS 16, but this was offset by capital gains on our shares held in treasury of AAA companies. The investments during the quarter were almost $300 million.

Turning to Slide #7. We are very confident of our strong capital structure. We increased our [ net ] value as well. Our balance sheet remains very solid. We have a net debt-to-EBITDA ratio of 1.5, with 80% of our debt in dollars and 20% in pesos. These are on a consolidated basis. This is consistent with our revenues, the breakdown in terms of dollars and pesos. These are approximately -- our revenues are approximately 80% of U.S. dollars. We have 91% of our debt at a fixed rate. We also have a very comfortable debt payment schedule that you can see on the next slide. We have no significant maturity in the Mining Division until 2035, and the other is for the next coming years at the Transportation Division.

I would like to address the -- or direct my comments into latest projects of Mr. Xavier Garcia de Quevedo. And we would like to mention that on July 9 at our Marine Terminal in Guaymas, Sonora, there was an incident that caused the discharge of around 3 cubic meters of sulfuric acid into the sea. This is an amount -- small amount that is equivalent to 1.2 household water tanks. And thanks to our immediate response, when compared with the 340 million cubic meters that the area has, this is a very insignificant amount. And when -- and with the chemical properties of the sea, which is alkaline, the acid was naturally and immediately neutralized with no human, flora or fauna casualties according to the Secretary of the Environment -- the Navy agency -- ministry.

On July 19, the PROFEPA declared a partial and temporary shutdown of that specific part of the terminal, the sulfuric acid part of the terminal, arguing the absence of an authorization of an environment impact. It is important to have in mind that this facility has been operating since 1979, so it was 100% in line with the regulations at that time. And this was before -- previous to the 1988 Mexican General Law of Ecological Balance and the Protection of the Environment. Therefore, these licenses are not a requirement for companies that have been operating before the mentioned law.

In addition, PROFEPA's awarded in 2009 a certification of Clean Industry and Environmental Quality for such facility, which has subsequently been renewed for 4 times for 2 periods -- 2 years each period. So we are now expecting any impacts into our operations because of this. We will continue to help and to bring -- and contribute to the environmental authorities with all the necessary elements in order to provide certainty, in order to reopen or reestablish the operations of that specific part as quick as possible.

I will now pass the call to Xavier for his comments on the Mining Division.

[Xavier García de Quevedo Topete, executive]

Good afternoon, everybody. Moving on to the Mining Division in Slide #9. Sales reached $2.02 billion, which translates in a 2% quarterly increase despite the decline in copper, zinc and silver prices. EBITDA was $959 million, a 0.6% growth versus second quarter of previous year.

Copper production reached 288,000 tons during the second quarter of this year, a 16.3% increase given a rise in production at all our operations, including Mexico, Peru and the U.S. In Mexico, production increased 8.8% compared to second quarter '18. And in Peru, the full ramp-up of the Toquepala expansion supported the 29.5% increase. In the U.S., we achieved a 13.9% increase. Investments in the Mining Division totaled $190 million during this quarter.

Going on to Slide 11. During the last quarter, LME copper price decreased from an average of $3.12 per pound in the second quarter of previous year to $2.77 per pound in the second quarter of this year, a 10% decrease. Even though we see a good physical market for copper, we believe the fall in prices in the second half of 2018 reflected the sentiment of the possible slowdown of the world economy, concerns with the Brexit and an escalation of trade tensions between the United States and China. We expect a recovery in copper prices in the coming months. The fundamentals are there.

On the supply side, production losses have reinforced our view of a deficit in the refined copper market as a result of labor strikes, heavy rains in Chile and Peru and technical problems. As a reference, Wood Mackenzie considers that so far, the industry have had 48 -- [ 4,060 ] to [ 301,000 ] tons of production loss. Consequently, we now expect a deficit of approximately 350,000 tons, 1.5% of world supply for the present year. We expect that this market deficit put pressure on copper prices during the second half of 2019. Let me point out that 2% [ supposed ] of more demand growth at approximately 480,000 tons of new copper demand.

Regarding our projects, I would like to note again that we are currently developing the next stage of growth to achieve a copper production capacity of nearly 2 million tons by 2027. This translates into 76% growth compared to this year's production, which we estimate will be 1.13 million tons of copper.

We are proud to note that our new concentrator in Toquepala has reached full capacity that will expand annual production by 100,000 tons of copper totaling 258,000 tons of copper in the Toquepala project. This project has also been completed within budget.

On July 8, the construction license for the Tia Maria project in Peru was obtained. The investment budget was $1.4 billion and will generate production of 120,000 tons of copper per year. We are committed to guarantee to the population of Islay that this project will not affect other economic farming and livestock activities as the project will use 100% of desalinized water for its operations. And a 32-kilometer access road and railroad will be built from the Tambo Valley for the transportation of its inputs and copper production.

In addition to our intense social work with the communities of the Tambo Valley, the company is currently implementing its very successful work program, Forging the Future, to train 700 people in 2019 in the Islay province. After the training, graduates from the program could apply for one of the roughly 9,000 jobs required during the construction stage of the Tia Maria project. We believe that the start of the construction activities for Tia Maria will generate important economic opportunities for the Islay province and the Arequipa region. Once it's operational, it will be generating significant contribution through royalties and mining tax from the onset. And therefore, all the population will be highly benefit from the social investments that come with our Tia Maria project.

We have continued so far to restart operations at the San Martin Mine. We have destined USD 87 million for 2019. The mine has 300,000 tons of ore, and the concentrator started production in mid-May. We are in the stabilization process of the concentrator. For 2019, we estimate an annual production of 9,889 tons of zinc, 3,384 tons of copper and 1.9 million ounces of silver.

Our Buenavista zinc operation, however, should be operational by the end of 2021 will bring 80,000 tons of zinc and 20,000 tons of copper, doubling the group's zinc production to 160,000 tons with an investment of USD 413 million.

Regarding more organic plays in the pipeline, I would like to mention Pilares as an open-pit with an annual production capacity of 35,000 tons of copper concentrates. The higher ore grade mineral will be transported to feed the main crushers of the La Caridad existing concentrator, improving the average ore grade significantly 0.78% expected at Pilares versus 0.34% copper grade [ quality ] at La Caridad. The investment budget for Pilares is $159 million, and we're expecting to begin operations during the second half of 2020. We are right now working the construction already. We plan to move forward to the primary concentrate process of the mine.

Additionally, the project to modernize the Hayden smelting facility in Arizona to comply 100% with the environmental regulation of the Environmental Protection Agency with an investment of $229 million has been completed. The smelting facility has state-of-the-art technology in the converter furnaces and the collection and management of gases and dusts. This will result in reaching the smelting design capacity of 630,000 tons per year of concentrates in [indiscernible]. We are at the start-up stage achieving 80% capacity and expecting to reach 100% capacity in the next -- in this quarter, third quarter.

Regarding the Aznalcóllar project located 35 kilometers from Seville, Spain. In the last quarter 2018 and the first quarter 2019, we carried out exploration activities, metallurgical as well as engineering work with very positive results. And the project's administrative process continues to progress as scheduled. The project investment is estimated at $290 million and will increase production by 105,000 tons of zinc per year. And I expect to begin operation during 2020.

I would like also to mention that the Mining Division of Mexico have enforced a certificate of Clean Industry and Environmental Quality. And of course, it included [indiscernible] certificate since 2009. And every 2 years, this will need to be renewed. As well, I would like to mention that because we are in the port, the port facility of Guaymas, we comply with all the requirements and authorization of the [indiscernible].

I will now pass the call to Fernando, who will comment on the Transportation Division.

[Fernando Guerra, executive]

Thank you, Xavier. Turning to Slide 14. The Transportation Division reached $636 million in sales, a 5.8% increase versus 2018, mainly driven by our automotive and industrial segment. We have reached, thanks to higher volumes, 1.1% higher in tons kilometers and 483,000 cars hauled. Our EBITDA reached $293 million, a 10% increase versus 2018. Net income, we had a decrease of 11.5%, affected mainly by deferred taxes, increased depreciation due to the financial leasing accounting methods of IFRS 16 and a loss from one of our own minority stake in the Ferrocarril Valle de Mexico.

Moving to Slide 15. There is a breakdown on a per segment basis. We have a sound automotive demand from that segment. We are migrating -- or our customers have been migrating from smaller vehicles into SUVs. That's the demand that the North American market is setting the trend. So we are witnessing plant conversions, so that is the driver. On industrials, we have a strong 18% growth because of finished goods sent to the U.S. and imports of waste paper and so some other materials into Mexico.

On the midrange growth, we have chemicals with increased fertilizers -- we're growing our market share on fertilizers and some import routes from -- for our resins. On metals, we saw a drop -- some drops in imports and exports into the U.S. However, we are growing in the Mexican market and some imports into Mexico. In intermodal, we had a medium to flat growth mainly because of capacity issues on some ports and empty equipment being updated into Mexico from the U.S. and some exports into the U.S. This was driven mainly because of the shortened capacity, shortened offer of trucks in the U.S., they updated the electronic logbook, which mandate drivers to not work more than 8 hours. So as the offer of drivers was less, the demand for intermodal services in the U.S. grew, and we got less boxes from there. We are preparing ourselves and evaluating, increasing the fleet with the U.S. carriers to offset this. In that, we could not grow as much as we wanted. We -- there were severe floods in the Midwest U.S., which prevented us from bringing more imports into Mexico. We are looking at a -- the U.S. carriers are having a better situation for this quarter, and we are seeing that the strength can change. Demand was -- we had a slow quarter because of the slowdown in some industrial -- in some construction projects in Mexico, mainly government infrastructure. The private sector continues to move.

On the decrease, we have a volume loss on energy, mainly coal and it's mainly due to the price of coal -- international price of coal. We -- our customers are looking for some end market. U.S. coal exported to Mexican ports into Asia, so we're looking for some alternatives.

And on the energy, we see one other segment where we foresee the most growth. We are witnessing a lot of terminals being built in our network, and this enables them, our customers, to unload finished products, such as diesel and gasoline, into end market in Mexico. As of today, we're probably handling not more than 3% or 4% of Mexico's consumption which is 1.2 million barrels a day [ some mix ], and we are not moving more than 30,000 or 40,000 barrels a day. We have signed contracts for [indiscernible] north of 150,000 barrels a day, and this continues to be one of our most dynamic segments.

On Minerals, what impacts us is mainly frac sand, et cetera, that our customers have migrated their technology to local sand. And we had an impact in the top there. It's across the board for all North American carriers. Our outlook in Page 16, we see a volume growth between 2% and 4% in some kilometers; a revenue between 7% and 10%; operating ratio, an improvement between 150 and 200 points; and our capital expenditures at $406 million, which is a bit south of 15%, 15.5% of our revenue.

Going forward throughout the year, automotive continues to grow. Industrials this year are still in double digits. The ag products that we -- as I have just mentioned, we see them improving, and now that the growth have diminished. Metals we see these improving as well with local and local traffic and imports. Minerals and cement, we see them on a regular growth. And in intermodal and energy, we just commented on that. If you go to Page 17, and I think this is an important message. We had an original CapEx budget of just over MXN 9 billion, $450 million, $460 million. We've cut back on that CapEx because of all the operating inefficiencies we've been having on precision -- on the precision schedule railroading methods, which has enabled us to relieve that -- has enabled us to improve our asset utilization. As of May, 20% of our fleet -- of our engine fleet is now parked, that's 166 engines that are not costing us on the maintenance part. We have also improved the length of our train. The fact that we do this means the longer our trains, the less crews you need to move the same cargoes. So we have improved our trains cost by 5%, so we have more available crews, we have more available capacity on our networks.

And when I go to the next slide additional slide, which is the CapEx we have asked from our board to allow us to deploy. The CapEx is mainly focused on getting more cargo on track. We have enough -- we have a surplus of capacity in our network, in our labor force and in our engine and we need to use it. So we will be putting out the $70 million CapEx. Starting this year, we will deploy between $15 million or $20 million, and the remainder in next year. This will not increase the MXN 7,926 million this year. From that, we're taking it away and which will become an ongoing process, as we're doing on the operating side, to become more efficient and improve our utilization. We're doing it from the ground up also on the commercial side to find new opportunities, improve the market share that we have. And for instance, I will go to what we're doing in Manzanillo and Altamira, the infrastructure of the port itself and the terminals in there is insufficient for us to continue to grow. So even from point A to point B, we have enough capacity, the actual origin and destination do not, so we're focusing our investments here. And on the diesel and gasoline terminals, we are putting some CapEx into the rail infrastructure of this terminal to help them deploy faster and to start gaining market share on that end as well. So I would now pass the word to Mario so that he can continue talking on the financial highlights of the Infrastructure Division.

[Mario Chavez Galas, executive]

Thank you, Fernando. Good morning or afternoon, everyone. I will go over the financial highlights of the Infrastructure Division. On Slide 19, the second quarter 2019, net revenues totaled $137 million and EBITDA was $68 million, 5% lower than second quarter 2018, which was USD 72.1 million. The Infrastructure Division's actual EBITDA at first half '19 was $132.8 million, 1% more than the current figure for the first half 2018.

Before we move on to relevant events, I would like to highlight that an investment of $410 million was approved early this year for acquisition of wind farms in a country that we supply 100% electric energy to various industries. Also approved $180 million for terminals in Guadalajara and Monterrey.

Moving on to Slide 20. During the second quarter, around 898,000 megawatt hours were generated versus 979,000 megawatt hours in the same period of 2018. This translates into an 8% decrease due to lower sales volume to third parties, [ CFE ] and the Mexican market. Given market conditions however, second quarter '19, EBITDA was $30 million and achieved 61% margin with higher sales in the El Retiro wind farm.

At the Salamanca-León Highway, in the second half of 2018, revenues totaled MXN 198 million, 5% more than in previous year, with an equivalent traffic of 19,000 units. Second quarter 2019 traffic versus second quarter '18 traffic to be exact. In 2018, the bid of contention, we are trying to build, operate exploit, reserve and maintain the Silao Bypass for a period of 30 years. The bypass shall be a high-spec, high-withstanding. 17.4 kilometers, which will connect the Bajío and Silao internal port via highway to Guanajuato city. Currently, 100% of the right-of-way on the trench-to-be have been released and 95% physical progress on the construction has been achieved. [ Trench will ] remain in the process of obtaining the release on the right-of-way. The second quarter 2019, in Mexico, Compañia Constructora revenues totaled $32 million and EBITDA, $6.7 million, which translates into a 26 and 39 increases versus second quarter 2018. The decrease in EBITDA versus the previous year is mainly due to the impact on cost restructuring resulting from completing the process of right-of-way in the railway sector. The oil and gas division, PEMSA, ended the year with 6 weeks in operation and an average efficiency of 98.9%. Revenues during second quarter '19 totaled $42.9 million and EBITDA $22.1 million, increasing 9% and 15%, respectively. Compared to second quarter 2018, the Zacatecas restarted operations on April 7 this year. Thank you very much.

Operator, could you please open the Q&A session? Goodbye.

[Operator]

[Operator Instructions] And our first question comes from Thiago Lofiego with Bradesco.

[Isabella Vasconcelos, analyst]

Actually, it's Isabella here. Thiago had to step out. So first, on Asarco, you've mentioned in the past that you were analyzing other corporations with potential operational efficiency improvement. Are you already closer to setting a plan? And also, if you could share with us a forecast in terms of volume and cost for the next few years? And then on the Transportation Division, you mentioned that you were able to increase average seating around 4% and average train lanes in around 5%. How much can we expect in terms of additional gains, if any, just to measure, and what kind of reduction in cash cost can we expect? Those are my 2 questions.

[Marlene de la Torre, executive]

So just to repeat, because we are hearing you a little bit far. The first question was related to Asarco, and the second, to Transportation Division, and the average train lane? Is that correct?

[Isabella Vasconcelos, analyst]

Yes, that's right.

[Xavier García de Quevedo Topete, executive]

Okay. Let me explain to you what is the progress of Asarco. First of all, we see the completion of the smelter at probably the [indiscernible] investment of 279 million that we need, and the month of June it worked at 80% capacity. It's ramping up, and we believe around the third quarter, it will reach 100% capacity. You'll see that especially the Mission mine, these have increased the production of about 38% in the Mission mines. And with those fees, we are working in the new mine planning for the right mine. And in the new plan, the preliminary result is that we have a long way to cover that, so 0.56% and the life mine of 33 years. We still have to work the balance of this year and parts of the next year to remove some of the waste in the mines. But we are very confident to increase production. There are facilities that is working okay, and we are also working on a plan to improve the economics of the [ cave-in ] concentrate. We have been able to effectively review this path significantly, and this, of course, continue to the result -- the financial results of Asarco.

[Fernando Guerra, executive]

Regarding the operating efficiencies on the transportation unit. We, of course, feel that can continue to improve the average train length as we have achieved for the past year, almost 5%. We believe we could deliver somewhere north another 5% on that end. We achieved on our labor cost with this. These are the direct impacts in our labor cost, which is about 15% or 16% of our total cost, so do the math a little bit.

[Operator]

And our next question comes from Lucas Yang with JPMorgan.

[Fugiwara Yang, analyst]

I have 2 simple questions. So after the dispute, there were news on the licenses possibly being revoked. Could you just share your views on possible regulatory changes in Mexico and if there's any legal grounds for those claims?

[Xavier García de Quevedo Topete, executive]

This is for the Mining Division?

[Marlene de la Torre, executive]

Yes.

[Fugiwara Yang, analyst]

Yes.

[Xavier García de Quevedo Topete, executive]

We're not expecting. That's actually [ no new regulatory change. We current only had to ] set up operation in the year 1979, and on that year, has an authorization from the Ministry of Transportation that [indiscernible]. And this was before the new law, all the -- again, for environmental equity law. And this law cannot be applied retroactively to companies. If we know it applied retroactively, there's going to be thousands of industries in Mexico. Other things that is important is that these are concession cycle -- the last concession cycle was October 15, 1993 for the operation and in our post-installation, yes. For the concession of copper products concentrate and as well as [indiscernible]. It is very important that we have on the environmental regions of Mexico, from the environmental ministry and operation license from September 25, 1995. That includes, of course, this to installations to restore change the [indiscernible]. And as I mentioned, we have this certificate issued from the environmental authorities for clean [ industry ] and environmental quality that we have for the first time since 2009, and we have renewed 4 times. Every few years, we have to renew this authorization. So we really, we are -- we don't have any problem of not having authorization...

[Marlene de la Torre, executive]

In addition, as we were mentioning before, we have in all of our Mexican operations, 24 certifications.

[Xavier García de Quevedo Topete, executive]

Of clean industry and environmental plan. Besides this we have I do know the items ISO for 2001.

[Marlene de la Torre, executive]

So therefore, we are not expecting any changes in our licensing, in our operations and in our concessions.

[Operator]

[Operator Instructions] Our next question comes from Carlos De Alba with Morgan Stanley.

[Jens Spiess, analyst]

Yes, this is actually Jen Spiess to take the call. You mentioned that the energy production decreased mainly due to low market conditions. Maybe could you elaborate on that? And also, what's the daily rate for the Zacatecas Platform? And if I may, could you maybe elaborate on Asarco? Why are shipments lagging production again? And is there any particular reason for that? And if you could tell us the cash cost for Asarco and also your expectations for how it will evolve in 2019 and 2020, and also the production there.

[Francisco Gonzalez, executive]

So regarding the energy production, the decrease in the production in the last quarter was mainly because, as we have informed before, 120 megawatts out of the 520 megawatts that we have in network combined cycle power plant are under the new energy reform, and those are sold under their spot prices daily. And the spot prices compared to last year has been decreasing. This is because there is a lot of power generation in the area and there still needs to be more transmission to evacuate that energy into other parts of the country, so that should improve as new transmission lines are being built. And also there has been some solar energy wind farms -- not wind farms, sorry, some solar energy projects being built in the area, which during the day, are able to generate that at very low cost, and therefore displacing other forms of energy production. So those 2 things meant that the cost prices were less attractive than last year, and therefore the decrease in production.

[Mario Chavez Galas, executive]

With regards to Asarco, the reason for the sales lagging the production was the operation of the smelter in the -- especially in the first quarter of the year, and that's mainly due. In the second quarter, we recovered some of that inventory that we built, we sold it. And for the breakeven or for the production, we're taking, finishing this year, and we're in course to do 133,000 tons, and next year, 155,600 tons of copper concentrate.

[Francisco Gonzalez, executive]

Finally, regarding the Zacatecas rate, the rate that we were able to negotiate with them is worth 65,000 a day. It also includes some escalation formula, so the expectation is that in November, this rate will grow to 68,000 a day.

[Jens Spiess, analyst]

Okay, great. And could you elaborate on who owns the Guaymas facility? Is it G Mexico or is it Southern Copper?

[Unknown Executive]

For Mexico or for…

[Marlene de la Torre, executive]

[indiscernible]

[Xavier García de Quevedo Topete, executive]

In Peru. We have, let's say, a concession to operate. We are within the port. With these concessions, we build our installations to collect copper concentrate for [indiscernible]. But we have the owner chief of these installations, but we are in the land that [indiscernible]. And we are ruled by the Port Authority. It's important to remember that we have the terminal as contractors to operate, let's say, the improvements or the achievements of copper concentrate and as well the for some. Of course, we are not saying that we are not responsible for these events, but of course, it is understandable that we defend our contractors [ first and foremost ].

[Marlene de la Torre, executive]

I think we'll also be very important to state the fact that this is, right now, about copper products, copper storage and copper [indiscernible] and have not been -- has nothing to do with [ anything else ].

[Operator]

And at this time, showing no questions in queue, I'd like to turn the call back over to Marlene Finny for further remarks.

[Marlene de la Torre, executive]

Well, thank you very much for joining us today on the second quarter conference call. And if you have any further thoughts, please keep in touch, we'll be glad to answer anything you need. Thank you so much.

[Xavier García de Quevedo Topete, executive]

Thank you.

[Operator]

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Everyone, have a great day.