Business Context and Reporting Period
This Form 8-K, filed on August 6, 2010, by Southern Copper Corporation, primarily serves to disclose a non-binding proposal from its parent company, Americas Mining Corporation (AMC), for an all-stock business combination with Asarco. The filing also includes a transcript of the company's Second Quarter 2010 earnings conference call held on July 29, 2010. Southern Copper is a Delaware corporation engaged in the mining and processing of copper, molybdenum, silver, and zinc.
Key Financial Metrics (Q2 2010)
- Net Sales: $1.2 billion (up 42% from $825 million in Q2 2009).
- Net Earnings: $313 million (up 79% from $175 million in Q2 2009).
- Diluted Earnings Per Share: $0.37 (up from $0.21 in Q2 2009).
- EBITDA: $612 million, representing 52% of sales (compared to $380 million or 46% of sales in Q2 2009).
- Operating Cash Cost: 26.5 cents per pound (including byproduct credits), a decrease of 13 cents from Q2 2009.
- Cash Cost (Pre-Byproduct): $1.57 per pound (up from $1.35 in Q2 2009).
- Capital Expenditures (Q2 2010): $92.9 million.
- Debt Issuance: $1.5 billion in fixed-rate senior unsecured notes issued on April 16, 2010 ($400 million due 2020 at 5.375%; $1.1 billion due 2040 at 6.75%).
- Dividend: Declared $0.37 per share, payable August 25, 2010.
Material Changes vs. Prior Period
- Revenue Growth: Driven by a recovery in metal prices and a 26% increase in molybdenum sales volume. Copper sales volume decreased by 5.6%, silver by 10.7%, and zinc by 2.8% compared to Q2 2009.
- Cost Increases: Total operating costs rose by $111 million year-over-year. Key drivers included worker profit sharing ($38 million), third-party copper concentrate purchases ($20 million), other operating materials ($15 million), and fuel/power ($14 million).
- Production Variances: Copper production from mines decreased 4.8% year-over-year due to lower ore grades at Cuajone and La Caridad. Conversely, molybdenum production reached a record 5,500 tons (up 26% year-over-year).
- Cananea Restoration: Following labor disputes, the company is restoring the Cananea mine at an estimated cost of $114 million, with full capacity targeted for February 2011.
Guidance, Outlook, and Risks
Production and Capital Guidance
- Copper: 2010 guidance maintained at 500,000 tons. 2011 guidance projected at approximately 650,000 tons (including ~150,000 tons from Cananea).
- Molybdenum: 2010 sales guidance increased from 19,000 to 20,000 tons.
- Zinc: 2010 sales estimated at 110,000 tons.
- Silver: 2010 sales estimated at 16.0 million ounces.
- Capital Program: Board approved a five-year, $3.8 billion investment program in Sonora, Mexico. Annual budgets are approximately $836 million for 2010, $1.1 billion for 2011, and $1.0 billion for 2012.
Proposed Transaction with AMC/Asarco
AMC has made a non-binding proposal for an all-stock combination. Southern Copper's Board is forming a special committee of independent directors to evaluate the proposal. If consummated, Southern Copper shareholders would receive AMC shares. The transaction requires approval by the full Board and a vote by all stockholders.
Risks and Contingencies
- Market Volatility: Concerns regarding U.S. demand recovery, China's growth, and the European debt crisis have caused metal price volatility.
- Operational Risks: Ore grade reductions at key mines (Cuajone, La Caridad) and flooding issues at Santa Eulalia (since resolved).
- Regulatory and Political: Risks include obtaining regulatory approvals for the AMC transaction, potential changes in royalty/tax laws in Peru and Mexico (though no specific initiatives are currently active), and unstable political conditions.
- Transaction Risks: Uncertainty regarding the ability to enter definitive agreements, due diligence results, and integration costs.
Investor Verification Checklist
- Verify the status of the special committee formed to evaluate the AMC/Asarco merger proposal.
- Monitor the timeline for Cananea's return to full capacity (targeted Feb 2011) and its impact on 2011 production guidance.
- Track progress on the $3.8 billion capital program, specifically the Tia Maria project's Environmental Impact Assessment (EIA) approval expected in Q4 2010.
- Review upcoming filings for the Proxy Statement regarding the proposed transaction with AMC.
- Assess the impact of fluctuating metal prices (copper, molybdenum, silver, zinc) on future cash costs and margins.