Southern Copper Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Southern Copper produces copper and by-products, with principal mining, smelting and refining operations in Peru and Mexico. Grupo Mexico indirectly owned 88.9% of the company. The independent accountant performed an interim review, not an audit.
Financial and operating performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $1,719.7 million | $1,753.4 million | Down 1.9% |
| Operating income | $533.3 million | $693.7 million | Down 23.1% |
| Net income attributable to SCC | $214.8 million | $388.2 million | Down 44.7% |
| Basic and diluted EPS | $0.28 | $0.50 | Down $0.22 |
| Cash provided by operating activities | $475.1 million | $371.3 million | Up $103.8 million |
| Capital expenditures | $101.0 million | $173.1 million | Down 41.7% |
- Operating margin was approximately 31.0%, versus 39.6% a year earlier; net income attributable to SCC represented 12.5% of sales, versus 22.1%.
- Cash and cash equivalents were $2,051.6 million at quarter-end, up from $1,925.1 million at December 31, 2019. Current assets were $4,139.7 million and current liabilities $1,387.2 million; the company reported a 2.98 current ratio.
- Long-term debt was $6,541.8 million, with $400.0 million current debt, for total debt of approximately $6,941.8 million. Lease liabilities totaled approximately $1,029.5 million. The filing reported a total debt-to-assets ratio of 0.43.
- Operating cash flow benefited from lower receivables and inventories, which together provided $193.6 million of cash; accounts payable and accrued liabilities used $102.4 million. Dividends paid were $309.2 million.
- Mine copper production increased 5.9% to 533.5 million pounds; copper sales rose 10.6% to 554.5 million pounds. Molybdenum, silver and zinc mine production also increased.
Material changes and drivers
- Lower metal prices weighed on sales: average LME copper fell 9.2% to $2.56 per pound, molybdenum prices fell 18.3%, and zinc fell 21.1%; silver rose 8.7%. Higher sales volumes largely offset these price declines.
- Operating costs and expenses rose 12.0% to $1,186.4 million. Management attributed the increase mainly to higher costs of metals purchased from third parties, lower capitalization of leachable material, and higher depreciation, amortization and depletion.
- Net income declined more sharply than sales, reflecting increased operating costs and higher net non-operating expense, including higher interest expense and lower capitalized interest. The effective tax rate increased to 50.8% from 38.1%, primarily due to foreign-exchange gains and losses associated with depreciation of the Mexican peso and Peruvian sol.
- Operating cash flow rose despite lower earnings, largely due to favorable working-capital movements. Investing cash outflow narrowed to $60.6 million, including $101.0 million of capital spending and $40.0 million of net proceeds from short-term investments.
- Effective January 1, 2020, the company changed its leach-pad inventory capitalization and consumption methods prospectively, treating the change as an accounting estimate. It reported a $48.8 million decrease in capitalized material and $10.3 million increase in consumption.
Outlook, risks and notable items
- COVID-19: At March 31, facilities in Mexico and Peru were operating at approximately 90% of capacity. Management reported no major delays in critical supplies, shipments or collections and no known employee cases at the mining facilities as of the filing’s reporting date. It cautioned that the pandemic’s effect on demand, operations, liquidity and results remained uncertain and could be material.
- Management noted copper prices had fallen to approximately $2.20–$2.30 per pound after the quarter, amid pandemic-related demand and supply uncertainty. The filing does not provide a specific full-year earnings or production forecast. Capital plans may be adjusted for economic conditions, markets or COVID-19.
- Management’s sensitivity analysis for the remaining nine months of 2020 estimated that a $0.10-per-pound copper price change would affect SCC-attributable net income by $137.8 million, assuming production and sales targets are achieved, tax rates are unchanged, and potential hedging is excluded.
- The company reported $2.0 billion in cash and stated it had no major debt maturity after the 2020 bond payment until 2022. It subsequently paid $400 million principal and $10.8 million accrued interest on the first tranche of its 2010 notes in April 2020. The board also authorized a $0.20-per-share dividend payable May 26, 2020.
- Potential environmental remediation costs for Peruvian soil sites could not yet be reasonably estimated; management expected studies and plans to progress during 2020. Tia Maria-related lawsuits and a Pasto Grande tailings-dam lawsuit remained pending, with potential contingencies not reasonably estimable. The company also reported 45 pending civil cases arising from the 2014 Buenavista spill, while stating it did not expect those proceedings to have a material effect on its financial position or results.
- Tia Maria construction remains subject to social and legal uncertainty despite the construction permit being ratified in 2019; $340.6 million had been invested against an approximately $1.4 billion project budget. The company reported approximately $252.5 million committed for capital projects and other social and infrastructure commitments.
- Other market and execution risks include volatile metal prices, currency movements, operating and labor issues, permitting, environmental obligations, litigation, and project costs and schedules. The filing reported no material change in contractual obligations during the quarter.
Most important facts for investors to verify
- Whether pandemic-related disruptions, operating limits or weaker copper demand materially change production, sales, collections or costs after March 31.
- Whether metal prices and sales volumes support margins, and whether reported cash generation persists once working-capital benefits are excluded.
- Debt service and liquidity after the $400 million note repayment, including the timing and funding of future maturities, dividends and capital commitments.
- Progress and remaining investment requirements for major projects, particularly Tia Maria and the Buenavista zinc project, including permitting, community and schedule risks.
- Developments in environmental remediation estimates and pending litigation, for which several potential loss amounts were not estimable in the filing.