Southern Copper Corporation - 10-Q Summary (Q2 2008)
Business Context and Reporting Period
This filing covers the quarterly period ended June 30, 2008. Southern Copper Corporation (SCC) is a large accelerated filer engaged in the production and sale of copper, molybdenum, zinc, silver, and gold. The company operates three primary segments: Peruvian open-pit operations, Mexican open-pit operations, and Mexican underground operations (IMMSA). As of July 31, 2008, there were 883,410,150 shares of common stock outstanding following a 3-for-1 stock split effective July 10, 2008.
Key Financial Metrics
| Metric (in millions, except per share) | 3 Months Ended June 30, 2008 | 6 Months Ended June 30, 2008 |
|---|---|---|
| Net Sales | $1,461.8 | $2,961.0 |
| Operating Income | $792.4 | $1,657.1 |
| Net Earnings | $548.5 | $1,113.5 |
| Earnings Per Share (Basic & Diluted) | $0.62 | $1.26 |
| Operating Cash Flow | $404.8 | $908.1 |
| Cash and Cash Equivalents | $1,150.3 (Balance Sheet) | $1,150.3 (Balance Sheet) |
| Total Debt | $1,294.9 (Current + Long-term) | $1,294.9 (Current + Long-term) |
| Capital Expenditures | $130.9 | $180.8 |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 20.0% in Q2 2008 and 7.0% in the first six months of 2008 compared to 2007. This was primarily driven by a significant reduction in copper sales volume due to the ongoing strike at the Cananea mine in Mexico, partially offset by higher metal prices (Copper LME avg: $3.83/lb in Q2 2008 vs. $3.47/lb in Q2 2007).
- Production Impact: Mine copper production dropped 25.9% in Q2 2008 (258.5 million lbs) compared to Q2 2007 (348.7 million lbs). The Cananea strike accounted for 77.3 million lbs of this decrease. Zinc production also fell 17.4% due to strikes at San Martin and Taxco mines.
- Cost Pressures: Operating costs were impacted by a 61% increase in unit power costs at Peruvian operations due to fuel escalation. However, lower workers' participation payments (due to strikes) and lower sales expenses helped offset some cost increases.
- Derivative Gains: The company recorded a gain of $1.4 million on derivative instruments for the six months ended June 30, 2008, a significant improvement from a loss of $76.7 million in the same period in 2007.
Outlook, Risks, and Management Commentary
- Labor Disputes: The Cananea mine strike remains unresolved. The company has liquidated a group of employees at a cost of $10.8 million and recorded an additional severance liability of $52.0 million. Production is expected to remain suspended until labor issues are resolved. Strikes at Taxco and San Martin mines also continue.
- Capital Expansion: SCC is executing a $2.1 billion investment program in Peru (Toquepala, Cuajone, and Tia Maria projects) expected to increase annual copper production by 39% by 2011. A potential $1.2 billion investment in the Los Chancas project is also under consideration.
- Dividends: The Board approved a quarterly dividend of $0.57 per share, payable September 5, 2008.
- Legal Contingencies: Significant litigation includes "labor share" claims by former Peruvian employees (Garcia-Ataucuri case) and disputes regarding mining rights and royalties in Mexico. Management believes these claims are without merit but notes the uncertainty of outcomes.
- Market Risk: The company remains exposed to volatility in copper, molybdenum, and zinc prices, as well as exchange rate fluctuations between the U.S. dollar, Mexican peso, and Peruvian nuevo sol.
Investor Verification Checklist
- Strike Resolution: Monitor the status of the Cananea, Taxco, and San Martin labor disputes, as prolonged stoppages directly impact production volumes and fixed cost absorption.
- Power Costs: Verify the impact of rising fuel and power costs on Peruvian operations and the progress of alternative power supply evaluations.
- Capital Project Execution: Track the progress and budget adherence of the Tia Maria, Toquepala, and Cuajone expansion projects.
- Legal Outcomes: Watch for developments in the Peruvian "labor share" litigation and Mexican royalty disputes, which could result in significant liabilities.
- By-Product Pricing: Assess the sustainability of high molybdenum prices, which significantly offset operating cash costs in the current period.