Southern Copper Corporation — 2010 Form 10-K
Business context and reporting period. This is the annual report for the fiscal year ended December 31, 2010, not a standalone fourth-quarter filing. Southern Copper is an integrated copper producer operating mines, smelters and refineries in Peru and Mexico, with exploration in those countries and Chile. Copper is its principal product; molybdenum, silver, zinc and other products are significant by-products. Grupo Mexico indirectly owned 80% of the Company.
Financial and operating performance
| Metric | 2010 | 2009 | Change / context |
|---|---|---|---|
| Net sales | $5,149.5 million | $3,734.3 million | Up 37.9%, chiefly from higher metal prices |
| Operating income | $2,604.2 million | $1,485.1 million | Operating margin 50.6%, versus 39.8% |
| Net income attributable to SCC | $1,554.0 million | $929.4 million | Up 67%; EPS $1.83 versus $1.09 |
| Gross margin | 53.0% | 42.5% | Improved with stronger prices |
| Operating cash flow | $1,920.7 million | $963.2 million | Higher earnings and improved working capital |
| Capital expenditures | $408.7 million | $414.8 million | 2011 budget approximately $1.7 billion |
| Cash and cash equivalents | $2,192.7 million | $772.3 million | At December 31 |
| Total debt | $2,760.4 million | $1,280.3 million | Debt-to-total capitalization rose to 41.4% from 24.7% |
| Net debt / net capitalization | 12.7% | 11.5% | Net debt was $567.7 million |
| Current ratio | 3.25 | 2.97 | Current assets of $3,703 million; current liabilities of $1,139 million |
Cash dividends paid were $1.68 per share in 2010, compared with $0.44 in 2009. The Company issued $1.5 billion of fixed-rate unsecured notes in April 2010: $400 million due 2020 at 5.375% and $1.1 billion due 2040 at 6.75%. Interest expense increased; total debt at year-end included a $10 million current portion.
Fourth-quarter 2010 net sales were $1,499.0 million, operating income $852.1 million, and net income attributable to SCC $492.2 million, compared with $1,136.0 million, $529.1 million, and $363.3 million, respectively, in fourth-quarter 2009.
Material changes versus the prior comparable period
- Average LME copper price increased 46.2% to $3.42 per pound; average molybdenum, zinc and silver prices rose 43.0%, 30.7% and 37.6%, respectively.
- Copper sales volume declined about 1% to 1,106 million pounds; mined copper fell 1.4% to 1,055 million pounds. Molybdenum production reached a record 45.2 million pounds, up 9.8%; zinc production fell 10.2% and silver production fell 4.2%.
- Buenavista operations resumed after the strike ended in June 2010. SXEW output returned to capacity in the fourth quarter; concentrator production was expected to reach full capacity in the first quarter of 2011. La Caridad processing capacity was affected by reduced Buenavista feed.
- The San Luis Potosi copper smelter closed in March 2010; concentrates were redirected to La Caridad. The Company began a $35.7 million demolition and soil-remediation program.
- Fuel and power, labor, repair, royalty and workers’ participation costs increased. Cost of sales excluding depreciation, amortization and depletion rose 15.1% to $2,099.4 million.
- Cash flow from operations increased by $957.5 million. The Company paid $1,428.0 million in dividends and funded much of the increase in cash through the 2010 debt issuance.
Outlook, commentary, risks and unusual items
- Management outlook: 2011 copper production was projected at approximately 630,000 metric tons, up 26%, assuming Buenavista’s restoration and third-party concentrate processing. Molybdenum production was forecast at about 17,000 metric tons, lower than 2010. The Company budgeted approximately $1.7 billion for 2011 capital spending. These are forward-looking estimates, not guarantees.
- Projects: Tia Maria was expected to produce about 260 million pounds of copper cathodes annually, with a $934 million estimated total investment; $432.5 million had been invested by year-end. EIA approval remained pending, with community opposition and potential delay or added costs. Management anticipated EIA approval in second-quarter 2011 and production in fourth-quarter 2012. Cuajone expansion and Buenavista projects also depend on execution, permitting and investment.
- Price protection: 2010 copper hedges generated a $41.9 million realized loss. Year-end hedges covered an estimated 51% of 2011 copper sales and 5% of first-quarter 2012 sales; additional early-2011 contracts raised coverage to 61% and 13%, respectively. Approximately $124.5 million of net-of-tax unrealized hedge losses was expected to be reclassified to earnings as hedged sales occurred, subject to copper prices.
- Labor and safety: Taxco and San Martin remained shut due to strikes dating from 2007; Taxco’s labor ruling was under appeal. Santa Eulalia was disrupted by flooding, with production restoration expected by October 2011. The filing reports 10 work-related fatalities in 2010 and another fatal accident at Toquepala in January 2011.
- Legal, regulatory and environmental matters: Peruvian former-employee lawsuits seek labor shares and dividends; the Company recorded no provision, citing defenses and inability to estimate the contingency. Other litigation includes disputes involving Tia Maria-related concessions and shareholder suits concerning the proposed AMC combination. Mexican legal changes may increase challenges to environmental approvals; environmental rules, closure obligations and remediation may increase costs.
- Control and related parties: AMC proposed an all-stock combination, offering 1.237 AMC shares per SCC share; the independent-director committee was evaluating it, with no decision deadline. The Company also disclosed related-party purchases and transactions and a $3.9 million remaining loan guarantee for a Larrea-family-affiliated aviation company.
- Other exposure: Results depend heavily on volatile metals prices and are exposed to energy costs, water availability, currency movements, labor disputes, political and regulatory conditions in Peru and Mexico, reserve-estimation uncertainty, and open-pit slope stability. The filing lists $9.03 billion of contractual obligations, including debt principal and interest, energy purchases, worker participation and committed project spending.
Most important facts for investors to verify
- Whether Buenavista achieved the expected concentrator ramp-up and whether the announced copper production outlook was met.
- Actual spending, schedule, permitting and community status for Tia Maria and other major expansion projects.
- Current copper hedge coverage, subsequent realized hedge results and the timing of loss reclassification into earnings.
- Debt maturities, covenant compliance, liquidity needs and the sustainability of dividends alongside the planned capital program.
- Developments in the AMC proposal, labor stoppages, material litigation and the potential financial effects of environmental or tax contingencies.
- Whether 2010 earnings growth reflects sustainable operating performance or is predominantly attributable to stronger commodity prices; the filing’s results show prices were a major driver.
The 2010 and 2009 financial statements received an unqualified independent audit opinion; the auditor also issued an unqualified opinion on internal control over financial reporting as of December 31, 2010.