Southern Copper Corporation — Q1 2023 Form 10-Q
Business context and reporting period
Southern Copper is an integrated copper and metals producer with mining, smelting and refining operations in Peru and Mexico. This unaudited filing covers the three months ended March 31, 2023, compared with Q1 2022; balance-sheet comparisons are with December 31, 2022. Grupo Mexico indirectly owned 88.9% of the company.
Financial and operating highlights
| Metric | Q1 2023 | Q1 2022 / prior balance date | Change |
|---|---|---|---|
| Net sales | $2,793.9 million | $2,763.8 million | +1.1% |
| Operating income | $1,353.7 million | $1,470.1 million | -7.9% |
| Operating margin | 48.4% | 53.2% | Lower |
| Net income attributable to SCC | $813.2 million; $1.05 per share | $784.7 million; $1.02 per share | +3.6% |
| Operating cash flow | $1,185.2 million | $820.7 million | +$364.5 million |
| Capital expenditures | $238.1 million | $205.2 million | +16.0% |
| Cash and cash equivalents | $2,299.8 million | $2,069.7 million at Dec. 31, 2022 | +$230.1 million |
| Long-term debt | $6,252.0 million | $6,251.2 million at Dec. 31, 2022 | Nearly unchanged |
Current assets were $5,197.7 million and current liabilities $1,247.3 million, or a current ratio of approximately 4.2x. Short-term investments were $140.6 million. Operating cash flow less reported capital expenditures was approximately $947 million. The company paid $773.1 million in common dividends during the quarter, equivalent to $1.00 per share.
Operating costs and expenses rose 11.3% to $1,440.2 million, outpacing sales growth. Management cited inventory changes, repair materials, explosives and reagents, fuel, labor and other costs; foreign currency effects and higher capitalization of leach material partly offset these increases. The effective tax rate fell to 36.9% from 43.8%, mainly because Q1 2022 included additional expense for uncertain Peruvian tax positions.
- Copper accounted for 76.9% of sales. Average LME copper was $4.05/lb, down 10.6% year over year; copper sales volume rose 10.0% to 504.3 million pounds.
- Molybdenum represented 10.8% of sales; its average price rose 68.7% to $32.04/lb, while sales volume fell 7.9%.
- Mined copper production increased 4.1% to 492.2 million pounds, helped by a 48.5% increase at Cuajone as it returned to full operating capacity. Molybdenum production fell 8.8%.
- Management’s non-GAAP operating cash cost was $2.09/lb before by-product credits and $0.76/lb net of credits, versus $1.83 and $0.55, respectively, in Q1 2022.
Material changes versus the prior comparable period
Sales increased modestly as higher copper, silver and zinc volumes and stronger molybdenum prices offset lower copper, silver and zinc prices and lower molybdenum volumes. Operating income declined as costs rose, even as attributable net income increased; lower income-tax expense and improved non-operating results contributed to the net-income increase. Operating cash flow improved substantially, with reported changes in operating assets and liabilities contributing $163.6 million in Q1 2023 versus a $271.4 million use of cash in Q1 2022. Capital spending also increased.
By segment, Mexican open-pit operating income fell 6.9% to $915.8 million, Peruvian operating income fell 15.7% to $449.2 million, and IMMSA operating income fell to $1.4 million from $31.0 million. IMMSA’s cost increase was driven notably by inventory changes and other operating costs.
Guidance, outlook, risks and unusual items
- Management forecast 2023 copper production of approximately 939,400 tonnes, up 5% from 2022; molybdenum of 23,400 tonnes, down 10.8%; silver of 20.3 million ounces, up 9.1%; and zinc of 116,300 tonnes, up 93.8%. It expected zinc output above 200,000 tonnes annually from 2024 onward. These are forward-looking estimates, not guarantees.
- Management described a constructive copper-market outlook, citing low inventories, prospective demand growth and constrained supply, while noting Q1 copper prices were below the prior-year level. It reported market-price sensitivities for the remaining nine months of 2023: a $0.10/lb copper-price change would affect estimated net income by $93.9 million; corresponding sensitivities were $22.5 million per $1/lb for molybdenum, $18.2 million per $0.10/lb for zinc and $9.5 million per $1/oz for silver.
- Key projects included Buenavista Zinc, for which operations were expected to start in H2 2023; Pilares, which was operating and expected to supply the Caridad concentrator at full capacity in Q2 2023; and El Pilar, for which production was expected to begin in 2025. Tia Maria remains on hold amid community and legal challenges. The filing describes project schedules and costs as estimates.
- On April 20, 2023, the board declared a $1.00-per-share dividend payable May 23, 2023. This was a subsequent event, after quarter-end.
- On April 29, 2023, Mexico’s Senate approved a fast-track mining-law bill. Proposed changes include shorter concession terms, new water-use conditions, environmental financial guarantees, limits on private exploration and a 5% net-earnings contribution to Indigenous communities for new projects. The company said it would assess the exploration changes and could not assure future laws would have no effect.
- Contingencies include pending lawsuits concerning Tia Maria and the 2014 Buenavista spill. Management says it is defending the claims; it cannot reasonably estimate some potential losses and believes the spill-related proceedings will not materially affect financial position or results. The Guaymas sulfuric-acid terminal matter remained pending, including a partial temporary shutdown affecting storage and transport at the terminal; the company said it did not expect an operational impact.
- Peru’s Law 31347 may require additional progressive-closure guarantees; implementing regulations had not been published, so the financial impact could not yet be fully estimated. Asset-retirement obligations were $591.5 million at quarter-end.
- Related-party purchases from Grupo Mexico and affiliates were $127.9 million in Q1 2023; related-party payables totaled $116.2 million at March 31. The filing describes review and approval procedures for material affiliate transactions.
The company reported no material cybersecurity incidents in the quarter and said disclosure controls were effective. Its interim financial statements received an independent accountant’s review, not an audit; the accountant reported no material modifications needed for U.S. GAAP conformity.
Important facts for investors to verify
- Whether 2023 production targets and project start-up dates are achieved, particularly at Buenavista Zinc and Pilares.
- Whether operating-cost inflation and rising cash cost per pound persist, and how metal prices and by-product credits affect margins.
- How the Mexican mining-law changes are finalized and affect exploration, water use, concessions and future projects.
- Developments in the Tia Maria, Buenavista spill and Guaymas matters, and any resulting operational, financial or closure obligations.
- Cash generation after capital spending and dividends, alongside debt levels, related-party transactions and the unresolved impact of Peru’s progressive-closure guarantee rules.