Southern Copper Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet comparisons are with December 31, 2017. Southern Copper is an integrated copper and metals producer operating primarily in Peru and Mexico. Grupo Mexico indirectly owned 88.9% of the company at quarter-end.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Net sales | $1,841.1 million | $1,583.9 million; up 16.2% |
| Operating income | $773.3 million | $570.4 million; up 35.6% |
| Operating margin | 42.0% | 36.0% |
| Net income attributable to SCC | $470.7 million; $0.61 per share | $314.4 million; $0.41 per share |
| Net margin attributable to SCC | 25.6% | 19.8% |
| Net cash from operating activities | $649.8 million | $490.1 million |
| Capital investments | $295.7 million | $245.6 million |
| Cash dividends paid | $231.9 million | $61.8 million |
Revenue and earnings growth primarily reflected higher metal prices: average LME copper rose 19.2%, molybdenum 56.8%, and zinc 23.0%; silver fell 4.4%. Copper sales volume declined 3.8% to 469.1 million pounds. Operating costs and expenses increased 5.4% to $1,067.8 million, including higher costs in Peru and higher depreciation, partly offset by lower Mexican open-pit costs. Q1 2017 also included a $10.2 million reversal of prior Sonora River remediation accruals.
Cash and cash equivalents were $1,068.2 million, with $56.5 million of short-term investments; current assets totaled $3,317.2 million and current liabilities $1,179.8 million. Long-term debt was $5,957.8 million, essentially unchanged from year-end. Current ratio was approximately 2.8x. Cash increased $63.4 million during the quarter after operating cash inflow, capital spending, dividends, and a negative $52.2 million foreign-exchange effect.
Material changes and operating results
- Mine copper production decreased 4.2% to 451.5 million pounds, mainly due to lower grades, ore hardness and recoveries at Cuajone, lower Buenavista SX-EW output, and weaker IMMSA production. Molybdenum production declined 1.9%; zinc declined 4.6%; silver increased 3.9%.
- Segment operating income rose to $552.3 million in Mexican open-pit operations, $189.3 million in Peru, and $38.9 million in IMMSA. The largest increase was in Mexican open-pit operations.
- Non-GAAP operating cash cost was $1.57 per pound before by-product credits, versus $1.48; after credits it was $0.79 versus $0.88, benefiting from stronger by-product prices. The filing cautions that this measure is non-GAAP and may not be comparable across companies.
- The effective tax rate declined to 33.6% from 36.3%, primarily because the U.S. Tax Cuts and Jobs Act generally eliminated U.S. tax on dividends from the company’s Mexican subsidiary. The company reported no material change to its provisional 2017 tax-law accounting and noted the ultimate effect could differ.
- ASC 606 revenue guidance was adopted January 1, 2018 with no cumulative adjustment and no change to the company’s revenue recognition method.
Outlook, projects, risks and contingencies
- Management expected 2018 copper production of 901,000 tons, up 3% from 2017, as the Toquepala expansion starts production; projected silver output was 17.5 million ounces, zinc 84,600 tons, and molybdenum 21,900 tons. These are forward-looking estimates, not assurances.
- The Toquepala concentrator expansion was 90% complete, with production expected in Q3 2018; the project had $968.1 million invested against a stated budget of approximately $1.3 billion. Management described a longer-term plan under development to increase copper production to 1.5 million tons by 2025.
- Tia Maria remained on hold pending a construction permit, which management expected in 2018. The approximately $1.4 billion project had $355.2 million invested; related litigation remained pending and the project faces community and permitting risk.
- Southern Copper won the Michiquillay bidding process in February for $400 million; estimated investment is approximately $2.5 billion, with production targeted for 2025. The filing states project information is based on estimates and development is not assured.
- Metal-price volatility is a key exposure. For the remaining nine months of 2018, a $0.10-per-pound copper price change was estimated to change net earnings by $94.7 million, assuming production and sales targets are met and excluding hedging effects. Currency, fuel and power costs, ore grades, permits, labor, weather, equipment and foreign-country risks could also affect results.
- Contingencies include lawsuits related to Tia Maria, the Pasto Grande tailings dam, the 2014 Buenavista spill, and a shareholder derivative action concerning related-party transactions and a power agreement. Management says it is defending the claims; it cannot reasonably estimate some potential losses and considers the Buenavista spill proceedings not material to financial position or results. A Peruvian soil-remediation contingency also could not yet be estimated; cost assessment was expected after studies progress, anticipated in Q1 2020.
- Workers at the San Martin and Taxco mines remained on strike, and operations were expected to stay suspended pending labor resolution. The company reported a non-material impairment for those mine assets.
- The company had approximately $1,401.9 million committed for capital projects. It declared a $0.30-per-share dividend payable May 23, 2018. Management reported no material change in contractual obligations or risk factors during the quarter.
Important facts for investors to verify
- Whether higher copper and by-product prices persist, and how production volumes and realized prices compare with management’s 2018 targets.
- Toquepala expansion commissioning, ramp-up, capital costs and expected production contribution.
- Permitting, community relations, litigation status and carrying-value assumptions for Tia Maria; development milestones and funding for Michiquillay.
- Debt maturity and interest burden, cash deployment, capital commitments, and the sustainability of dividend payments.
- Updates on Buenavista spill claims, Peruvian soil remediation estimates, and labor disputes at San Martin and Taxco.
- Potential final adjustments to U.S. tax reform accounting and the effect of new tax provisions. The independent accountant performed an interim review, not a full audit, and reported no material modifications needed to the interim financial information.