Southern Copper Corporation — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The filing is an annual report, not a standalone fourth-quarter filing; it also reports unaudited Q4 results. Southern Copper is an integrated copper producer operating in Peru and Mexico, with exploration in other Latin American countries. Copper accounted for 78.0% of 2014 sales.
Financial and operating performance
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Net sales | $5.788 billion | $5.953 billion | -2.8% |
| Operating income | $2.233 billion | $2.532 billion | -11.8% |
| Net income attributable to SCC | $1.333 billion | $1.619 billion | -17.6% |
| Diluted EPS | $1.61 | $1.92 | Down $0.31 |
| Gross / operating / net margin | 43.2% / 38.6% / 23.0% | 45.1% / 42.5% / 27.2% | All declined |
| Cash from operations | $1.356 billion | $1.857 billion | Down $501 million |
| Capital expenditures | $1.535 billion | $1.703 billion | Down 9.9% |
The cash-flow statement reports capital expenditure cash outlays of $1.530 billion; management’s capital expenditure measure is $1.535 billion. Operating cash flow was below capital spending. Cash and cash equivalents were $364 million at year-end, with $338.6 million in short-term investments and $19.5 million in restricted cash. Current assets were $2.490 billion versus current liabilities of $1.151 billion (current ratio 2.16).
Total debt was $4.206 billion, approximately unchanged year over year; net debt increased to $3.842 billion from $2.532 billion as cash declined. Net debt to net capitalization rose to 39.7% from 31.3%. A $200 million note matures in 2015; most remaining debt matures thereafter. The company reported compliance with its debt covenants.
Copper production increased 9.7% to 1.492 billion pounds, and copper sales rose 4.7% to 1.448 billion pounds. Molybdenum production rose 16.2%; zinc production fell 33.0% and silver production fell 3.9%. The average LME copper price declined 6.3% to $3.11 per pound. Management’s non-GAAP copper cash cost was $1.89 per pound before by-product credits and $1.05 after credits, versus $1.90 and $1.00, respectively, in 2013.
Q4 2014: Net sales were $1.471 billion, operating income $525.5 million, net income attributable to SCC $348.0 million and diluted EPS $0.43. Q4 2013 figures were $1.535 billion, $615.9 million, $406.2 million and $0.48, respectively.
Material changes and notable items
- Lower copper and silver prices, together with lower silver and zinc sales volumes, contributed to lower revenue and earnings. Higher copper and molybdenum volumes and higher molybdenum and zinc prices partly offset the declines.
- Operating costs included a $91.4 million environmental remediation charge for the Buenavista spill. The company recorded a $316.2 million shareholder-derivative legal expense in 2012; that unusual charge did not recur in 2014.
- The 2014 cash balance fell by $1.309 billion. Cash was used for capital investment, $381.0 million of dividends and $682.8 million of share repurchases.
- The company changed leachable-material amortization from a five-year period to a units-of-production method after a new plant entered service. The 2014 impact was approximately $17 million; management expects future effects to be significant as production increases.
- New Mexican mining royalties and other tax changes affected 2014 results. The effective tax rate was 36.5%, compared with 32.4% in 2013.
Outlook, risks and contingencies
For 2015, management forecast copper production of 782,300 metric tons, molybdenum of 21,500 tons, silver of 12.7 million ounces and zinc of 86,200 tons. It planned $2.7 billion of capital investment, principally for Buenavista, Toquepala and Tia Maria. The longer-term program targets copper capacity of 1.165 million tons by 2018, compared with 617,000 tons in 2013. These plans depend on project execution, permits, community support, water access, costs and market conditions; the filing cautions that forecasts are not assurances.
- Buenavista spill: In August 2014, about 40,000 cubic meters of copper sulfate solution reached the Bacanuchi River and a tributary of the Sonora River. The company recorded $91.4 million for remediation and claims and deposited approximately $74.9 million in a government-agreed trust, with a total trust commitment of up to about $150 million. Administrative proceedings and three collective-action lawsuits were pending; the company disputed the claims and considered the proceedings not likely to have a material financial effect.
- Controls: Management found internal control over financial reporting ineffective because access to the Mexican operations’ legacy ERP system was not adequately restricted. The auditor issued an adverse opinion on internal controls, while giving an unqualified opinion on the financial statements. SAP was implemented in Mexico in February 2015; remediation was planned during 2015.
- Other legal and operating risks: Labor disputes have kept the Taxco and San Martin mines closed since 2007. Peruvian former employees’ labor-share claims remain unresolved and the company says the amount cannot be reasonably estimated. Other risks include commodity-price volatility, energy and water availability, mine-slope stability, environmental regulation, permitting and community opposition. Eight fatalities occurred in 2014—five in Mexico and three in Peru.
- Governance and related parties: Grupo Mexico indirectly owned 84.6% of SCC and has voting control. The company disclosed significant transactions with Grupo Mexico affiliates, including power purchases and construction and other services.
Important facts for investors to verify
- Progress, cost and production ramp-up for Buenavista expansions, Toquepala and Tia Maria, including required authorizations and community agreements.
- Final environmental-spill remediation costs, trust disbursements, and outcomes of related administrative and civil proceedings.
- Whether SAP access controls and other remediation steps address the disclosed material weakness, and whether the auditor later concludes controls are effective.
- Cash generation, liquidity and financing needs against the planned $2.7 billion 2015 capital program, dividend policy and share repurchases.
- Exposure to copper and by-product prices, and the effect of lower zinc output, energy costs, water constraints and the long-running mine strikes.