Southern Copper Corporation — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual filing, not a standalone fourth-quarter report. Amounts are in U.S. dollars unless noted.
Business context and results
Southern Copper is an integrated copper producer, with mining, smelting and refining operations in Peru and Mexico. Its three reportable segments are Peruvian operations, Mexican open-pit operations and Mexican underground operations (IMMSA). Copper accounted for 80.2% of 2019 sales. Grupo Mexico indirectly owned 88.9% of the company.
Management reported record annual net sales of $7.286 billion. Higher sales volumes—particularly following the Toquepala expansion and San Martin mine restart—more than offset lower average copper and molybdenum prices at the revenue level.
Key financial and operating metrics
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales | $7,285.6 million | $7,096.7 million |
| Operating income / margin | $2,753.0 million / 37.8% | $2,881.2 million / 40.6% |
| Net income attributable to SCC | $1,485.8 million | $1,543.0 million |
| Basic and diluted EPS | $1.92 | $2.00 |
| Gross margin / net margin | 40.0% / 20.4% | 42.5% / 21.7% |
| Cash provided by operating activities | $1,911.9 million | $2,235.1 million |
| Capital investments | $707.5 million | $1,121.4 million |
| Cash and cash equivalents at year-end | $1,925.1 million | $844.6 million |
| Total debt at year-end | $6,940.8 million | $5,960.1 million |
| Current assets / current liabilities | $4,184.7 / $1,476.5 million | $3,180.0 / $1,216.3 million |
- Net debt, as defined by the company, was $4,935.0 million, versus $4,901.7 million in 2018. Net debt to net capitalization was 41.8%, compared with 42.6%; total debt to total capitalization rose to 50.3% from 47.4%.
- Mining production rose 12.5% for copper to 2,191.0 million pounds, 22.3% for molybdenum to 59.3 million pounds, 17.1% for silver to 20.3 million ounces, and 4.4% for zinc to 163.0 million pounds.
- Non-GAAP operating cash cost was $1.52 per pound of copper before by-product credits and $0.88 net of by-product credits; the comparable 2018 figures were $1.54 and $0.87.
- The board declared $1.60 per share in dividends during 2019, totaling $1,236.9 million in cash distributions. A further $0.40-per-share dividend was authorized in February 2020 for payment in March.
Material changes versus the prior year
- Sales increased 2.7%, while operating income fell 4.4% and SCC-attributable net income fell 3.7%. Average LME copper price declined 8.1%; molybdenum price declined 5.0% and zinc declined 12.8%, while silver rose 3.3%.
- Operating costs and expenses increased 7.5% to $4,532.6 million. Cost of sales rose $197.4 million, and depreciation, amortization and depletion rose $90.1 million, including higher depreciation following expansion investments.
- Operating cash flow declined $323.2 million, with working-capital changes reducing cash flow by $347.0 million. Capital investment fell 36.9% as the Toquepala expansion approached completion.
- Cash increased by $1,080.5 million during the year. The company issued $1.0 billion of Minera Mexico senior notes due 2050 at 4.5%; it had $399.8 million of debt due in 2020.
- Toquepala reached full production in the second quarter. San Martin restarted in the second quarter after an extended strike and refurbishment. Taxco remained on strike, with operations suspended since 2007.
Outlook, risks and contingencies
- 2020 outlook: Management expected copper production of 998,400 tons, approximately in line with 993,822 tons in 2019; silver production of 23.7 million ounces; zinc production of 80,600 tons; and molybdenum production of 26,700 tons. The board approved a 2020 capital investment program of $1,146.7 million. These are forward-looking estimates.
- The company described a long-term objective to increase annual copper production to 1.5 million tons by 2028. Projects include Buenavista Zinc, Pilares and El Pilar in Mexico, and Tia Maria, Los Chancas and Michiquillay in Peru. Project timing, costs and production remain subject to execution, permitting, economic conditions and community acceptance.
- Tia Maria received a construction permit in July 2019, which was ratified in October; management nevertheless said construction would be delayed while it pursued dialogue with neighboring communities and awaited suitable economic and political conditions. Related lawsuits remained pending.
- Management’s early-2020 commentary noted copper prices of about $2.55–$2.60 per pound amid COVID-19 concerns. It said the demand impact was difficult to assess, expected a mild market surplus if supply growth proceeded as planned, and viewed a timely containment and recovery scenario as possible—not assured.
- Key exposures include volatile metal prices, energy and water availability and costs, currency movements, political and regulatory conditions in Peru and Mexico, labor disputes, mine safety, slope and tailings stability, environmental obligations, and project delays. Four workplace fatalities occurred in 2019.
- Environmental and litigation matters include Peruvian soil studies for which remediation costs could not yet be reasonably estimated; lawsuits related to Tia Maria; and ongoing claims and proceedings arising from the 2014 Buenavista spill. The company considered the spill-related proceedings not expected to materially affect its financial position or results, but outcomes remain uncertain.
- A July 2019 sulfuric-acid release at the Guaymas terminal led to a partial temporary shutdown of sulfuric-acid storage and transport activities. The matter remained unresolved at year-end; the company stated it did not then expect an operational impact.
- Other notable items: the company recorded $945.3 million of income tax provision at a 39.0% effective rate. 2017–2018 tax reform adjustments were a major prior-period comparability item; the 2017 non-cash tax charge was $785.9 million. The company also recorded $1,588.7 million of leach-pad inventory, identified as a critical audit matter, and had $68.9 million of uncertain tax positions.
Most important facts for investors to verify
- Whether the 2020 production and $1,146.7 million capital-spending plans were achieved, and whether new projects remain on schedule and within budget.
- How copper and by-product prices, production costs, working capital and cash generation evolved after year-end.
- Debt maturities, covenant compliance, the use of proceeds from the 2019 notes issuance, and the sustainability of dividends relative to investment needs.
- Progress on Tia Maria community engagement and litigation, Peruvian soil remediation estimates, and resolution of the Guaymas restrictions and Buenavista-related claims.
- Recoverability assumptions for leach-pad inventory and deferred tax assets, and developments in the company’s uncertain tax positions.
- Related-party transactions and governance: Grupo Mexico’s 88.9% ownership, including purchases and services from affiliated companies.
Audit and controls
The independent auditor issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting as of December 31, 2019. The auditor highlighted leach-pad inventory valuation, uncertain tax positions and assessment of impairment indicators for Tia Maria as critical audit matters.