Southern Copper Corporation — Q2 2014 Form 10-Q
Business context and reporting period. Southern Copper is an integrated copper and other-metals producer operating in Peru and Mexico. This unaudited quarterly report covers the three and six months ended June 30, 2014, compared with the same periods in 2013. The interim statements were reviewed by the independent accountant, not audited.
Financial and operating highlights
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Net sales | $1.487 billion | $1.410 billion | $2.842 billion | $3.033 billion |
| Operating income | $597 million | $566 million | $1.160 billion | $1.340 billion |
| Net income attributable to SCC | $337 million | $373 million | $661 million | $868 million |
| EPS, basic and diluted | $0.40 | $0.44 | $0.79 | $1.03 |
| Operating cash flow | $349 million | $302 million | $684 million | $897 million |
| Capital expenditures | $376 million | $385 million | $699 million | $702 million |
- Q2 sales increased 5.5%, while attributable earnings declined 9.5%. First-half sales fell 6.3% and attributable earnings fell 23.9%.
- Operating margin was approximately 40.2% in Q2 and 40.8% for the first half, versus 40.2% and 44.2%, respectively, in 2013. These margins are calculated from reported sales and operating income.
- First-half operating cash flow less capital expenditures was approximately negative $16 million, compared with positive $195 million in the prior-year period.
- At June 30, cash and cash equivalents were $1.335 billion and short-term investments were $290 million, together down from $1.881 billion at December 31, 2013. Total debt was approximately $4.205 billion, including $200 million current debt; year-end total debt was approximately $4.205 billion.
- Current assets were $3.313 billion and current liabilities $1.026 billion. The company paid $0.22 per share in dividends during the first half; a $0.12 per-share dividend was declared after quarter-end.
Material changes versus the prior period
- Q2 sales growth reflected greater copper and molybdenum sales volumes and higher molybdenum and zinc prices, partly offset by weaker copper and silver prices and lower silver and zinc sales volumes. For the first half, lower copper and silver prices were the main sales headwind.
- Copper mine production rose 12.1% in Q2 and 10.6% in the first half. Molybdenum production rose 29.6% and 22.4%, respectively. Zinc production fell 39.0% in Q2 and 26.1% in the first half, including lower grades and an accident-related disruption at Charcas.
- First-half income tax expense rose to $430 million from $407 million; the effective tax rate increased to 39.8% from 32.2%. A new Mexican mining royalty contributed $46.6 million of first-half tax expense and 4.7 percentage points to the effective rate.
- First-half depreciation, amortization and depletion increased to $227 million from $184 million, reflecting equipment and projects entering service. The balance sheet shows property, net, increasing to $6.934 billion from $6.476 billion.
Outlook, commentary and risks
- Management expected 2014 mine production of 672,400 metric tons of copper and 22,000 tons of molybdenum. It lowered its outlook to 15 million ounces of silver and 82,000 tons of zinc because of lower grades and temporary disruptions.
- The Buenavista SX-EW III plant began commercial production in June; management expected full capacity by the end of Q3 2014 and 53,400 tons of copper contribution for 2014. The company’s expansion program aimed to raise copper capacity about 87%, from 630,000 tons in 2013 to 1.175 million tons by 2017.
- Management described copper-market fundamentals as improving despite softer Q2 prices. It expected limited likelihood of a 2014 surplus, while emphasizing exposure to volatile metal prices. For the remaining six months of 2014, estimated net income sensitivity was $4.7 million per $0.01/lb copper-price move, $14.7 million per $1/lb molybdenum move, $0.6 million per $0.01/lb zinc move and $5.1 million per $1/oz silver move.
- The Tia Maria project’s environmental impact assessment was approved on August 1, 2014, after quarter-end. Management expected work to begin by year-end and targeted production in Q1 2017, subject to project execution and other approvals. Project spending through June 30 was $537 million, of which $189.5 million had been reassigned to other operations.
- Major uncertainties include metal-price movements, production and grade performance, cost inflation, project timing and financing, environmental permits and requirements, labor relations, currency movements, and political and legal risks. Tia Maria and Toquepala expansion face community and permitting considerations; Toquepala EIA comments were expected to be addressed in Q3.
- Peruvian labor-share lawsuits involving former employees remain unresolved; management made no provision because it believes it has defenses and cannot reasonably estimate the contingency. Strikes at the San Martin and Taxco mines remained unresolved, with operations expected to stay suspended. A separate suit seeks demolition of the tailings dam used for Toquepala and Cuajone.
- The company reported $368.3 million committed for Mexican expansion programs for expenditure over the next 12 months, alongside substantial long-term power-purchase commitments. It also disclosed significant related-party activity; Grupo Mexico indirectly owned 82.5% of SCC, and SCC had a $161.2 million non-current receivable from affiliate MGE.
Most important facts for investors to verify
- Whether copper and molybdenum production gains, and the lowered silver and zinc targets, were achieved; monitor the Charcas disruption and other grade-related issues.
- Whether expansion schedules, budgets and expected output—particularly Buenavista, Toquepala and Tia Maria—remain on track, and whether required permits and community agreements are secured.
- How weaker metal prices, the higher Mexican royalty burden and working-capital investment affect earnings, cash generation and funding needs.
- Developments and potential exposure from the labor-share claims, San Martin and Taxco strikes, tailings-dam litigation, and evolving environmental obligations.
- Terms, collectability and governance oversight of related-party balances and transactions, including the MGE receivable and power arrangements.