SOUTHERN COPPER CORP quarterly report, Q3 FY2014

Southern Copper Corporation — Q3 2014 Form 10-Q

Reporting period: Three and nine months ended September 30, 2014. Unless noted otherwise, financial amounts below are in U.S. dollars. Southern Copper is an integrated copper and other metals producer operating primarily in Peru and Mexico; Grupo Mexico indirectly owned 83.5% at quarter-end.

Financial and operating results

Metric	Q3 2014	Q3 2013	Nine months 2014	Nine months 2013
Net sales	$1.475 billion	$1.385 billion	$4.316 billion	$4.418 billion
Operating income	$547.1 million	$583.6 million	$1.707 billion	$1.924 billion
Net income attributable to SCC	$324.3 million	$344.2 million	$985.0 million	$1.212 billion
Diluted EPS	$0.39	$0.41	$1.18	$1.44
Operating cash flow	$435.6 million	$465.2 million	$1.119 billion	$1.362 billion
Capital expenditures	$411.6 million	$488.2 million	$1.111 billion	$1.191 billion

Q3 operating margin was approximately 37.1%, versus 42.1%; nine-month operating margin was 39.6%, versus 43.6%. Nine-month net margin attributable to SCC was approximately 22.8%, versus 27.4%.
At September 30, cash and cash equivalents were $1.034 billion, short-term investments $208.0 million, and restricted cash $37.2 million. Current assets were $2.955 billion and current liabilities $1.224 billion.
Total debt was approximately $4.206 billion, including $200 million current and $4.006 billion long-term, compared with $4.205 billion at year-end 2013. Cash less total debt was approximately $3.172 billion, excluding short-term investments.
Nine-month dividends paid were $283.0 million, and share repurchases were $388.9 million. The company paid $0.12 per share in Q3 and declared another $0.12 dividend after quarter-end.
Reported operating cash cost, a non-GAAP measure, was $1.14 per copper pound in Q3 and $1.04 for the nine months, including by-product credits; the comparable 2013 figures were $1.07 and $1.00.

Material changes versus prior periods

Q3 sales rose 6.5%, but SCC-attributable net income declined about 5.8%. Higher copper and molybdenum sales volumes and stronger molybdenum prices lifted sales; lower copper prices and lower silver volume and prices partly offset the gains. Higher costs and a $37.2 million Buenavista spill remediation provision reduced operating income.
Nine-month sales declined 2.3% and SCC-attributable net income declined about 18.8%. Lower copper and silver prices and lower silver and zinc sales volumes outweighed higher copper and molybdenum volumes and higher molybdenum and zinc prices.
Nine-month mined copper production increased 9.1% to 1,086.9 million pounds; molybdenum rose 23.9%. Zinc production fell 33.0% and silver fell 2.8%. Operating costs and expenses increased 4.6% for the period.
The effective tax rate increased to 38.3% from 33.5%, principally reflecting Mexico’s new mining royalty tax and the non-deductible environmental remediation provision.

Outlook, risks and contingencies

Management reduced 2014 mined copper production guidance to 658,000 tons from 672,000, citing the Buenavista accident’s impact on the SX-EW III ramp-up. It raised molybdenum guidance to 23,400 tons, and expected 12 million ounces of silver and 68,300 tons of zinc, with silver and zinc outlook reduced because of lower grades and temporary disruptions.
Management described copper prices as likely to remain relatively soft in the near term, while viewing longer-term supply fundamentals favorably. It anticipated higher zinc prices over the next few years and noted near-term molybdenum price pressure from new supply.
The company spent $1.111 billion on capital expenditures in the first nine months, about 74% of its $2.3 billion 2014 budget. It cited a longer-term program intended to raise copper capacity from about 630,000 tons in 2013 to 1.175 million tons by 2017. Approximately $600 million was committed to capital projects at quarter-end.
The August 6 Buenavista spill released approximately 40,000 cubic meters of copper sulfate solution into the Bacanuchi/Sonora river system. SCC recorded $37.2 million of remediation expense and deposited approximately $37 million into a trust toward a two-billion-peso (about $150 million) remediation and compensation fund. The company said it could not reasonably predict additional costs. Management reported cleanup work and reopening of wells after water tests, but regulatory, remediation and compensation exposure remains.
Major projects remain dependent on approvals and execution. Tia Maria’s environmental impact assessment was approved in August; management expected construction authorization by year-end 2014 and a 2015 start, but gave no assurance on timing. Toquepala expansion EIA approval was expected in Q4 2014. Buenavista SX-EW III full capacity was expected by year-end, later than previously planned.
Other disclosed exposures include Peruvian former-employee labor-share lawsuits for which no provision was recorded because management asserted defenses and said the amount could not be reasonably estimated; ongoing land/concession and tailings-dam litigation; and prolonged strikes suspending San Martin and Taxco mine operations. The filing also notes related-party transactions, including substantial purchases and a $161.2 million receivable from Grupo Mexico affiliate MGE.
Commodity prices, exchange rates, operating disruptions, permitting, environmental requirements, labor relations, litigation and project execution are identified risks. The filing reported no material change to previously disclosed risk factors. The interim financial statements were reviewed by the independent accountant, not audited.

Important facts for investors to verify

Subsequent regulatory findings, remediation spending, claims and any further liabilities arising from the Buenavista spill and trust fund.
Whether revised copper, silver and zinc production expectations are achieved, and whether the SX-EW III plant reaches capacity on schedule.
Permitting, community support, construction timing and funding for Tia Maria, Toquepala and other expansion projects.
Developments in labor-share claims, the San Martin and Taxco strikes, and other material litigation or environmental proceedings.
Cash generation and liquidity as large capital spending, dividends and repurchases continue; monitor debt maturities and committed long-term power purchase costs.
Related-party balances and transactions, particularly MGE’s repayment of its loan and power-supply arrangements.