Southern Copper Corporation — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012; comparative periods are the same periods in 2011. Southern Copper mines and sells copper and by-products, primarily from operations in Peru and Mexico. Figures below are in U.S. dollars; financial statement amounts are generally in millions unless indicated otherwise.
Financial and operating performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $1,659.9 | $1,801.5 | $3,465.8 | $3,403.5 |
| Operating income | $875.6 | $998.7 | $1,848.5 | $1,761.5 |
| Net income attributable to SCC | $563.5 | $658.0 | $1,185.0 | $1,136.4 |
| EPS, basic and diluted | $0.66 | $0.77 | $1.40 | $1.32 |
| Operating margin | 52.8% | 55.4% | 53.3% | 51.8% |
| Operating cash flow | $377.1 | $202.7 | $1,097.5 | $717.8 |
- Q2 sales fell 7.9% and SCC-attributable net income fell 14.4%, mainly reflecting lower metal prices despite higher sales volumes. Average LME copper price declined 14% year over year to $3.57 per pound; average silver, molybdenum and zinc prices also declined.
- For the first six months, sales rose 1.8% and SCC-attributable net income rose 4.3%. Copper sales volume increased 15.5% to 716.1 million pounds; mined copper production rose 15.9%. Higher volumes offset lower realized prices.
- Six-month operating costs and expenses declined 1.5% to $1,617.3 million. Lower third-party concentrate purchases were partly offset by higher fuel and power, labor, repairs and workers’ participation costs.
- Operating cash cost was $0.59 per pound in Q2 and $0.56 for the first six months, including by-product credits; without those credits, it was $1.70 and $1.76, respectively. This is a company-defined non-GAAP measure and may not be comparable across companies.
- Six-month income included $18.2 million gain on sale of an investment and $24.7 million of equity earnings from the Tantahuatay affiliate. The six-month effective tax rate increased to 35.1% from 32.1%, principally due to Peru’s new special mining tax and additional U.S. tax provision on dividends remitted from Mexico.
Cash, debt and capital allocation
- At June 30, cash and cash equivalents were $1,079.4 million and short-term investments were $373.8 million, totaling $1,453.1 million. Total current assets were $3,071.7 million versus current liabilities of $758.4 million.
- Debt totaled $2,741.0 million, including $10.0 million current and $2,731.0 million long-term; the reported carrying amount was below estimated fair value of $3,091.2 million. Cash and short-term investments less debt were approximately $1,287.9 million, a simple calculation rather than a company-defined measure.
- Six-month investing cash outflow was $236.0 million, including $407.7 million of capital expenditures and net redemptions of short-term investments. Financing cash outflow was $649.5 million, including $610.2 million of dividends and $33.2 million of share repurchases. Operating cash flow benefited from a smaller working-capital outflow than in 2011.
- The company paid a $0.53-per-share quarterly dividend in May. On July 26, the board authorized a subsequent $0.24-per-share dividend, payable August 28, 2012. Long-term debt was broadly unchanged from year-end 2011.
Outlook, projects and risks
- Management maintained 2012 production guidance of 640,000 tons of copper, including 3% purchased from third parties; molybdenum guidance was about 17,200 tons. Zinc and silver production were expected to be around 2011 levels.
- Management cited volatile metal prices and macroeconomic uncertainty, including Europe’s debt crisis and possible slowing in China. It viewed copper fundamentals as supportive but acknowledged demand and supply uncertainty. A $0.01-per-pound copper price change was estimated to change annual SCC net income by $7.9 million, assuming other stated conditions.
- Capital expenditures were $407.7 million in the first half. Major projects include Buenavista expansion and equipment, Toquepala and Cuajone expansions, and other mine investments. Management expects to fund projects from cash, internal funds and external financing if required; schedules and budgets remain subject to permits, market conditions and execution.
- Tia Maria, a proposed project exceeding $1 billion, remained suspended following protests and governmental action. SCC was preparing a new environmental impact assessment and rescheduled potential start-up to 2015, subject to approvals; no approval timing is assured. Cumulative spending was $485.8 million, and management said any impairment, if required, was not expected to be material.
- Labor disputes remain a risk: the San Martin and Taxco mines in Mexico had been on strike since July 2007. Peruvian collective bargaining agreements were due to expire during 2012, with negotiations expected to continue into early 2013.
- Significant legal matters include former-worker labor-share claims in Peru, for which no liability was recorded because management cited defenses and said the amount could not be reasonably estimated; appeals remained pending in other Peruvian cases. A separate Delaware judgment awarded $1,347 million plus interest against AMC defendants in litigation concerning the 2005 Minera Mexico transaction. The judgment was stayed pending appeal after security was accepted; SCC separately appealed the $304.7 million attorneys’ fee award, payable by SCC from the judgment proceeds rather than existing cash.
- The filing identifies environmental, commodity-price, currency, permitting, operating, labor and litigation risks. Management reported no material change to risk factors and no material change in internal control over financial reporting. The interim financial statements received an independent accountant’s review, not an audit.
Important facts for investors to verify
- Whether production growth and planned expansion projects meet stated guidance, budgets and timelines, including required permits.
- How copper and by-product prices, production costs and by-product credits affect margins and cash generation.
- Progress on Tia Maria’s environmental review and approvals, and the potential consequences of continued delay.
- Developments and potential financial effects of the Delaware judgment and Peruvian labor-share litigation.
- Future dividend and capital-spending levels relative to operating cash flow, liquidity and debt obligations.