Southern Copper Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; balance-sheet comparisons are with December 31, 2020. Southern Copper is an integrated copper and other minerals producer operating principally in Peru and Mexico. The interim financial statements are unaudited and were reviewed by the independent accountant.
Financial performance and position
| Metric | Q1 2021 | Q1 2020 / prior date |
|---|---|---|
| Net sales | $2,532.5 million | $1,719.7 million; up 47.3% |
| Operating income | $1,351.6 million | $533.3 million; up 153.4% |
| Net income attributable to SCC | $763.8 million; $0.99 per share | $214.8 million; $0.28 per share |
| Net income margin attributable to SCC | 30.2% | 12.5% |
| Operating margin | 53.4% | 31.0% |
| Net cash from operating activities | $782.6 million | $475.1 million |
| Capital expenditures | $232.6 million | $101.0 million |
| Cash and cash equivalents | $2,267.3 million | $2,183.6 million at Dec. 31, 2020 |
| Short-term investments | $415.9 million | $410.8 million at Dec. 31, 2020 |
| Long-term debt | $6,545.0 million | $6,544.2 million at Dec. 31, 2020 |
| Current ratio | 3.66 | 3.49 at Dec. 31, 2020 |
Net cash used in investing activities was $237.8 million, primarily reflecting capital spending; financing activities used $465.1 million, including $463.8 million in common dividends. Cash increased $83.7 million during the quarter. A simple operating-cash-flow less capital-expenditure calculation was approximately $550 million, versus $374 million in Q1 2020; this is not a company-reported GAAP measure. Cash and short-term investments totaled approximately $2.68 billion, against $6.55 billion of long-term debt, excluding lease liabilities.
Material changes versus prior year
- Revenue growth was principally price-driven: average LME copper rose 50.4% to $3.85 per pound; silver rose 55.8%, molybdenum 17.1%, and zinc 28.9%. Copper accounted for 83.6% of sales.
- Copper sales volume declined 4.5% to 529.6 million pounds, while mined copper production declined 1.5% to 525.6 million pounds. Management attributed lower output mainly to lower ore grades in Peru and Mexico.
- Total operating costs and expenses were broadly flat, down 0.5% to $1,180.9 million. Higher metal prices and stable aggregate costs supported substantially higher operating income and earnings.
- Operating cash cost before by-product credits rose 6.7% to $1.51 per pound; after by-product revenues it fell 3.9% to $0.74 per pound, reflecting higher by-product revenue.
- Capital expenditures more than doubled, up 130.3%; cash dividends paid rose to $463.8 million from $309.2 million.
- Production remained below the prior year for silver (down 6.3%) and zinc (down 14.5%); molybdenum production was approximately flat.
Outlook, commentary and principal risks
- Production outlook: Management expects copper production of 943,000 tons in each of 2021 and 2022, citing temporary lower ore grades and recoveries in Peru, and expects production to reach 1,031,000 tons in 2023 as operations recover and projects contribute. For 2021, it expects 21.4 million ounces of silver, 76,200 tons of zinc and 26,800 tons of molybdenum.
- Market outlook: Management described the 2021 copper outlook as positive, citing rising prices, anticipated demand recovery and relatively low inventories. It noted copper prices above $4.30 per pound at the time of its discussion. Results remain highly sensitive to volatile metal prices; management estimated that a $0.10-per-pound copper price change would affect remaining-2021 SCC net income by about $124.2 million, assuming stated production and other assumptions.
- Projects and spending: Q1 capital investment was $232.6 million. Major projects include Buenavista Zinc, Pilares, El Pilar, Quebrada Honda and Tia Maria. Tia Maria’s estimated budget is $1.4 billion, with $338.9 million invested through quarter-end; construction remains exposed to permitting, litigation and community opposition. The company reported approximately $322.7 million committed to capital investment projects.
- COVID-19: Facilities in Mexico and Peru were operating at approximately 98% of capacity. The company reported no major delays in critical supplies, shipments or collections, but said the pandemic’s full financial and operational effects remained uncertain. About 95% of Mexico’s workforce and 80% of Peru’s workforce were working onsite or remotely under safety measures.
- Cybersecurity: A March 1 ransomware attack encrypted 479 servers and 303 personal devices in Mexico and the United States. Management said the ERP system was unaffected, affected servers were restored, and the investigation had found no concrete evidence of data theft. Costs recorded to date were $0.1 million; additional costs were expected.
- Contingencies: Litigation includes five Tia Maria-related cases, unresolved claims concerning the 2014 Buenavista spill, a Pasto Grande tailings-dam dispute, and a shareholder derivative action relating to affiliate transactions. Management says it is defending the matters; some potential losses cannot be reasonably estimated. The 2019 Guaymas sulfuric-acid spill matter remained pending, though the company did not expect an operational impact. The Taxco mine remained suspended amid a labor dispute; San Martin had reached full operating capacity.
- Other items: The company reported no impairment indicators at March 31, 2021. It had no major debt maturity until 2022. The board declared a subsequent $0.70-per-share dividend, payable May 25, 2021. The IRS 2014–2016 audit was effectively settled April 14, 2021; any change in unrecognized tax benefits was not expected to be material.
Most important facts for investors to verify
- Whether copper prices and other commodity markets sustain the unusually strong price contribution to Q1 earnings, and the sensitivity of results to price changes.
- Progress against management’s 2021–2023 production outlook, particularly recovery in Peruvian ore grades and planned project start dates.
- Capital spending, project commitments and cash returns to shareholders relative to operating cash generation and debt obligations.
- Developments in Tia Maria permitting, litigation and community opposition, and the status and potential exposure of other legal proceedings.
- Operational, financial and disclosure consequences of the ransomware incident, and the continuing effects of COVID-19 on workforce and production.
- Related-party dealings with Grupo Mexico affiliates, given Grupo Mexico’s 88.9% ownership and the company’s significant affiliate purchases, services and power arrangements.