Southern Copper Corporation (SCCO) — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. SCC is an integrated copper and other-metals producer operating primarily in Peru and Mexico; Grupo Mexico indirectly owned 88.9% at quarter-end. Financial figures are unaudited and in U.S. dollars unless noted.
Financial and operating performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $2,129.1 million | $1,859.5 million | $5,634.2 million | $5,431.0 million |
| Operating income | $943.9 million | $713.8 million | $2,054.3 million | $2,121.2 million |
| Net income attributable to SCC | $506.0 million | $389.6 million | $980.3 million | $1,180.2 million |
| Diluted earnings per share | $0.65 | $0.50 | $1.27 | $1.53 |
| Operating cash flow | $793.5 million | $585.2 million | $1,688.0 million | $1,370.5 million |
| Capital expenditures | $134.5 million | $182.7 million | $348.8 million | $536.1 million |
- Q3 operating margin was approximately 44.3%, versus 38.4% a year earlier; nine-month operating margin was approximately 36.5%, versus 39.1%. SCC-attributable net margin was approximately 23.8% for Q3 and 17.4% year to date, compared with 20.9% and 21.7%, respectively.
- Q3 sales rose 14.5%, supported by higher copper and silver prices and 2.1% higher copper sales volume. Nine-month sales rose 3.7%, as higher sales volumes were partly offset by lower copper, molybdenum and zinc prices.
- Nine-month operating costs and expenses increased 8.2% to $3,579.9 million. Management cited increased volumes and cost of third-party metal purchases, lower capitalization of leach material, and $18.9 million of COVID-related costs. These pressures contributed to a 16.9% decline in SCC-attributable nine-month net income.
- Nine-month mined copper production was 1,635.0 million pounds, up 0.6%; molybdenum was up 19.4% and silver up 10.4%, while zinc declined 2.6%. Q3 mined copper production fell 2.3%, principally due to lower ore grades at Toquepala and Cuajone.
- Non-GAAP operating cash cost per pound, net of by-product revenues, was $0.65 in Q3 and $0.69 year to date, down from $0.82 and $0.84, respectively. The company cautions this measure may not be comparable across companies.
Liquidity, debt and capital allocation
- At September 30, cash and cash equivalents were $2,145.4 million, versus $1,925.1 million at year-end 2019. Current assets were $4,337.8 million and current liabilities $1,161.7 million, for a reported current ratio of 3.78.
- Long-term debt was $6,543.4 million; no current portion was reported after repayment of $400 million of 2010 bonds in April. Cash less reported debt implies net debt of approximately $4,398 million, excluding lease liabilities. Management reported no other major debt maturity before 2022.
- Nine-month operating cash flow exceeded capital expenditures by approximately $1,339 million. Financing cash outflow was $1,175.1 million, including $773.1 million of common dividends and the $400 million debt repayment.
- The company paid $0.40 per share in August and declared a subsequent $0.50 per-share dividend, payable November 24, 2020. Capital project commitments were approximately $475.1 million at quarter-end.
Outlook, risks and notable items
- Outlook: SCC expected 2020 copper production of 996,500 tons, broadly in line with 2019 but slightly below its initial plan; forecast molybdenum production of 29,400 tons, silver of 21.6 million ounces and zinc of 72,600 tons. These are estimates, not guarantees. Management gave no clear full-year earnings or revenue guidance.
- Management described a positive long-term copper-market view, citing recovery in demand and potential supply constraints, while acknowledging continued uncertainty. For the remaining three months of 2020, its sensitivity analysis estimated that a $0.10/lb change in copper prices would change net earnings by about $138 million, assuming other stated conditions hold.
- COVID-19 remained a material uncertainty. Facilities were operating at approximately 96% of capacity; the company reported no major supply, shipment or collection delays through quarter-end. It said the pandemic’s future financial and operational effects remained uncertain. Exploration had restarted except in Chile.
- A January 2020 change to leach-stockpile accounting estimates reduced capitalized material by $218.0 million and increased consumption by $1.2 million versus the comparable nine-month period. Management treated the change prospectively as an estimate change. SCC reported no impairment indicators at September 30.
- The nine-month effective income tax rate increased to 44.4% from 38.2%, primarily due to foreign-exchange movements. Nine-month non-operating expense also increased, including a $16.6 million provision for rain damage in Peru; the prior-year period included a $25.0 million insurance recovery.
- Key contingencies include lawsuits challenging the Tia Maria project and ongoing litigation related to the 2014 Buenavista spill. SCC said the spill-related proceedings were not expected to materially affect its financial position or results, but outcomes remain unresolved. A shareholder derivative case concerning Grupo Mexico affiliate transactions remained pending; the company gave no view on likelihood or potential loss. The Guaymas sulfuric-acid terminal matter, including a partial shutdown of storage and transport, also remained pending, with SCC reporting no expected operational impact.
- Major projects include Buenavista Zinc, Pilares and El Pilar in Mexico, and the Quebrada Honda dam expansion in Peru. Tia Maria’s $1.4 billion project remains subject to social and legal issues; $338.4 million had been invested through September 30. Project timing, costs and production estimates are forward-looking and subject to revision.
- The independent accountant performed a review, not an audit, of the interim statements and reported no material modifications needed for GAAP conformity. Management said disclosure controls were effective and reported no material change in internal control during the quarter.
Investor verification priorities
- Track copper and by-product prices, sales volumes, production trends and the assumptions behind SCC’s production forecast and price sensitivities.
- Assess whether cost increases—especially third-party metal purchases, leach-stockpile accounting effects and COVID-related expenses—persist, and how they affect margins and cash generation.
- Verify liquidity and debt maturity schedules, cash available after dividends and committed capital spending, and the distinction between debt and lease liabilities.
- Monitor COVID-related staffing and operating conditions, and the resolution and potential consequences of Tia Maria, Buenavista spill, Guaymas and derivative litigation matters.
- Review the status, funding and revised schedules for major projects and social commitments; the filing’s forecasts and project estimates are not assurances of completion or returns.