Southern Copper Corporation — Q2 2021 Form 10-Q
Business context and reporting period. Southern Copper is an integrated copper and by-product producer operating primarily in Peru and Mexico. This unaudited quarterly report covers the three and six months ended June 30, 2021; comparisons below are with the corresponding 2020 periods unless noted. Grupo Mexico indirectly owned 88.9% of the company.
Financial and operating performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $2,897.0 million | $1,785.4 million | $5,429.5 million | $3,505.1 million |
| Operating income | $1,675.2 million | $577.2 million | $3,026.8 million | $1,110.4 million |
| Net income attributable to SCC | $932.7 million | $259.5 million | $1,696.6 million | $474.3 million |
| EPS, basic and diluted | $1.21 | $0.34 | $2.19 | $0.61 |
| Operating cash flow | $1,061.5 million | $419.3 million | $1,844.2 million | $894.5 million |
| Capital expenditures | $219.8 million | $113.3 million | $452.4 million | $214.3 million |
Q2 operating margin was approximately 57.8% versus 32.3%; net income attributable to SCC was approximately 32.2% of sales versus 14.5%. For the first half, those margins were approximately 55.7% versus 31.7%, and 31.2% versus 13.5%, respectively.
- Cash and liquidity: At June 30, cash and cash equivalents were $2,394.3 million and short-term investments were $545.8 million. Current assets were $5,511.5 million and current liabilities $1,452.1 million; the reported current ratio was 3.80.
- Debt and equity: Long-term debt was $6,545.9 million, broadly unchanged from year-end 2020. Cash and short-term investments together were about $2.94 billion. The company reported no major debt maturity scheduled until 2022. Total equity was $7,972.8 million.
- Cash generation and distributions: First-half operating cash flow increased by $949.7 million year over year. Cash used in investing was $597.9 million and cash used in financing was $1,007.7 million, including $1,005.0 million of common dividends. Cash at period-end was $2,394.3 million.
- Production and costs: Q2 mined copper production fell 6.3% to 522.7 million pounds; copper sales volume fell 13.6% to 514.9 million pounds. First-half mined copper production declined 3.9% to 1,048.3 million pounds. The non-GAAP cash cost per pound, net of by-product revenues, was $0.59 in Q2 and $0.66 for the first half, versus $0.67 and $0.72 in 2020.
Material changes versus prior periods
- Q2 sales rose 62.3% and first-half sales rose 54.9%, driven principally by higher metal prices. Q2 average LME copper was $4.40 per pound versus $2.42; first-half average was $4.13 versus $2.49. Molybdenum, silver and zinc prices also increased substantially.
- Despite price-driven growth, sales volumes declined for copper, molybdenum and silver. Management attributed lower copper output mainly to lower ore grades, particularly at Toquepala and Buenavista; molybdenum and silver output also weakened. First-half zinc production declined 4.0%, partly because of a severe-flooding shutdown at Santa Eulalia.
- Operating costs and expenses rose only 1.1% in Q2 and 0.3% for the first half, while operating income increased sharply. Management cited higher worker participation and repair, fuel and power costs, partly offset by lower purchases of third-party metals and other items.
- The first-half effective income tax rate declined to 40.6% from 48.2%, primarily reflecting foreign-exchange effects related to the Mexican peso in 2020. The company effectively settled its 2014–2016 IRS audit in April 2021, with no material financial-statement effect.
- Capital expenditures more than doubled year over year for the first half. Dividends paid in that period were $1,005.0 million, compared with $463.8 million in 2020.
Outlook, management commentary and key risks
- Production outlook: Management expected copper production of 958,000 metric tons in each of 2021 and 2022, affected by temporarily lower ore grades and recoveries in Peru. It expected production to recover to 1.03 million metric tons in 2023, supported by Peruvian recovery and Pilares, El Pilar and Buenavista Zinc projects. The company also forecast 2021 production of 20.6 million ounces of silver, 72,800 metric tons of zinc and 28,300 metric tons of molybdenum.
- Metal-market outlook: Management described its 2021 copper-market view as positive, citing demand, low inventories and expected market supply constraints. It noted copper near $4.25 per pound at the time of the report. These expectations are subject to commodity-price volatility and are not guarantees.
- Projects and commitments: Pilares was expected to begin production in Q1 2022; Buenavista Zinc and El Pilar were expected to start in 2023. Tia Maria is a proposed $1.4 billion project; $340.4 million had been invested through June 30, 2021, but work remained on hold amid continuing legal and community opposition. Management reported approximately $253.4 million of committed capital-project spending at quarter-end.
- COVID-19: Facilities in Mexico and Peru were operating at approximately 95% of production capacity. Management reported no major delays in critical supplies, shipments or collections, while noting the pandemic’s future financial and operational effects remained uncertain. Approximately 67% of the Peruvian workforce and 96% of the Mexican workforce were working on-site or at home under safety measures.
- Cybersecurity: A March 2021 ransomware attack encrypted 479 servers and 303 personal devices; the company said its ERP system was not affected and the forensic investigation had not found concrete evidence of data theft. It recorded $0.3 million in incident costs through June 30 and could incur further costs.
- Legal, environmental and labor matters: Tia Maria-related cases and a Pasto Grande tailings-dam lawsuit remained pending; management said the potential amounts could not be reasonably estimated. Litigation stemming from the 2014 Buenavista spill continued, although the company said it did not expect the proceedings to materially affect financial position or results. The Guaymas sulfuric-acid terminal shutdown matter remained pending, with no expected operational impact stated. A four-year agreement was signed with one Peruvian union, and negotiations with five others continued.
- Other risks: Results are sensitive to metal prices, ore grades and recoveries, operating input costs, foreign exchange, labor relations, permits, litigation, environmental obligations, COVID-19 and political or economic conditions in operating countries. A $0.10-per-pound copper-price change was estimated to change remaining-2021 net income by about $58.7 million, assuming other stated conditions.
The board authorized a further $0.90-per-share dividend on July 22, 2021, payable August 26 to shareholders of record August 12. Management reported effective disclosure controls; the independent accountant’s interim review did not identify material modifications needed, but was not an audit.
Most important facts for investors to verify
- Whether copper production and sales recover as forecast, particularly as Peruvian ore grades and recoveries improve.
- Whether metal prices and by-product revenues sustain margins, and how actual operating costs compare with management’s assumptions.
- Project execution, spending and schedules for Pilares, Buenavista Zinc, El Pilar and Tia Maria, including Tia Maria’s legal and social-permit status.
- Debt maturities beginning in 2022, dividend affordability and liquidity after planned capital spending and distributions.
- Developments in the Tia Maria, Pasto Grande, Buenavista spill and Guaymas matters, including any changes to estimated contingencies or operations.
- Cybersecurity remediation and any later evidence of data exposure or additional costs; COVID-related workforce and production effects.
- Related-party dealings with Grupo Mexico and affiliates, which are significant suppliers and service providers; assess their terms and oversight given Grupo Mexico’s controlling ownership.