Southern Copper Corporation — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual report, not a standalone fourth-quarter filing. Southern Copper is an integrated copper producer operating principally in Peru and Mexico; copper generated 81.6% of 2020 sales. Grupo Mexico indirectly owned 88.9% of the company.
Financial and operating highlights
| Metric | 2020 | 2019 |
|---|---|---|
| Net sales | $7.985 billion | $7.286 billion |
| Operating income / margin | $3.121 billion / 39.1% | $2.753 billion / 37.8% |
| Net income attributable to Southern Copper | $1.570 billion | $1.486 billion |
| Basic and diluted earnings per share | $2.03 | $1.92 |
| Operating cash flow | $2.784 billion | $1.912 billion |
| Capital investment | $592 million | $708 million |
| Cash and cash equivalents | $2.184 billion | $1.925 billion |
| Total debt | $6.544 billion | $6.941 billion |
- Gross margin was 41.1% (40.0% in 2019); net margin was 19.7% (20.4%). The effective income tax rate rose to 42.8% from 39.0%.
- Cash plus short-term investments totaled $2.594 billion. Net debt was $3.950 billion; net debt to net capitalization improved to 35.2% from 41.8%. The current-assets-to-current-liabilities ratio was 3.49.
- Operating cash flow less reported capital investment was approximately $2.19 billion; this is a simple calculation, not a company-reported free-cash-flow measure. Cash dividends paid were $1.160 billion, and the company repaid $400 million of debt.
- Mined copper production was 2.208 billion pounds, up 0.8%; copper sales were 2.306 billion pounds, up 6.1%. Average LME copper price was $2.80 per pound versus $2.72. Molybdenum production rose 12.5%, silver 6.2%, while zinc fell 6.8%.
- Non-GAAP operating cash cost net of by-product revenues was $0.69 per copper pound versus $0.88. Management attributed the reduction partly to temporary reductions or deferrals in operating, stripping and maintenance costs during the pandemic.
Changes versus 2019
- Sales rose 9.6%, primarily on higher copper, silver and molybdenum sales volumes and higher copper and silver prices; lower molybdenum and zinc prices partly offset the gains.
- Operating income increased 13.4% and attributable net income increased 5.7%. Higher operating costs—including third-party metal purchases, reduced capitalization of leachable material and $27.6 million of COVID-related production costs—partly offset stronger sales.
- Operating cash flow increased by $872 million. Working-capital movements were a significant factor, including lower inventories and higher payables, partly offset by higher receivables.
- Capital investment declined 16.3%. Total debt decreased, including repayment of the $400 million notes that matured in 2020.
Outlook, risks and unusual items
- Management expects copper production of approximately 943,000 metric tons in 2021 and 2022, with recovery to approximately 1.031 million metric tons in 2023. It forecasts 2021 production of 21.4 million ounces of silver, 76,200 tons of mined zinc and 26,800 tons of molybdenum.
- The board approved a 2021 capital investment program of $1.431 billion. Key projects include Pilares, expected to begin production in 2022; Buenavista Zinc and El Pilar, each expected in 2023; and Tia Maria in Peru. Timing and results are subject to execution, permitting, community and market risks.
- Management expressed a positive view of the copper market, citing recovering demand, particularly in China, and low reported inventories. Copper prices are volatile and materially affect earnings; the company’s own sensitivity estimate indicates a $0.10-per-pound copper price change would change annual net income attributable to the company by about $122 million, assuming stated production, sales and tax assumptions.
- COVID-19 disrupted workforce availability and operations, but facilities were reported to be operating at approximately 98% of capacity at year-end. The full pandemic impact remained uncertain. The $27.6 million of COVID-related costs was expensed.
- A revised estimate for Mexican mine closure obligations increased the asset-retirement obligation by $269.3 million in 2020, taking the balance to $545.0 million. The filing also reports a change in leach-inventory accounting estimates: compared with the prior method, capitalized material was $196.4 million lower and consumption was $29.3 million lower in 2020.
- Important exposures include dependence on metal prices; operations concentrated in Peru and Mexico; currency, energy and water risks; labor disputes (Taxco remains on strike); environmental and tailings-dam risks; and community opposition. Tia Maria has construction authorization but faces community and legal challenges. Litigation related to the 2014 Buenavista spill and other matters remains pending; management says outcomes or potential losses cannot be clearly estimated in some cases.
- Related-party transactions with Grupo Mexico affiliates include energy, transport, construction and services. The filing identifies governance and potential conflicts of interest as risks. The company reported no material cybersecurity breach in 2020.
Key facts for investors to verify
- Whether copper production and the 2021–2023 project schedule meet management’s stated expectations, and how ore grades and recoveries affect output.
- Whether the copper-price outlook and by-product revenues support earnings and the reported low net cash cost; note the cost measure is non-GAAP and includes volatile by-product credits.
- Whether the $1.431 billion 2021 capital program, project budgets and expected start dates remain achievable, particularly for Tia Maria and Buenavista Zinc.
- The assumptions supporting leach-pad inventory recoverability and the substantially higher Mexican asset-retirement obligation.
- Developments in Tia Maria community acceptance and litigation, Buenavista spill-related claims, and the Taxco labor dispute.
- Debt covenants, planned dividend capacity and related-party dealings given Grupo Mexico’s controlling ownership. The 2020 dividend was $1.50 per share; a further $0.60-per-share dividend was authorized in January 2021.