Southern Copper Corporation — Q2 2019 Form 10-Q
Business and period: Southern Copper produces copper and related metals, with principal operations in Peru and Mexico. This unaudited report covers the quarter and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods. Grupo México, through AMC, owned 88.9% of the company.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $1,818.0 million | $1,837.2 million | $3,571.4 million | $3,678.4 million |
| Operating income | $713.6 million | $787.6 million | $1,407.3 million | $1,561.0 million |
| Net income attributable to SCC | $402.4 million | $409.6 million | $790.6 million | $880.3 million |
| Diluted earnings per share | $0.52 | $0.53 | $1.02 | $1.14 |
| Cash from operations | $414.1 million | $406.2 million | $785.3 million | $1,056.1 million |
| Capital expenditures | $180.4 million | $253.9 million | $353.5 million | $549.6 million |
- Q2 operating margin was approximately 39.3%, versus 42.9% a year earlier; first-half margin was approximately 39.4%, versus 42.4% (calculated from reported sales and operating income).
- First-half operating cash flow less capital expenditures was $431.8 million, compared with $506.5 million in 2018. Operating cash flow fell 25.6%, with working-capital movements—including lower accounts payable and accrued liabilities and higher prepaid taxes—being a significant drag.
- Cash and cash equivalents were $752.2 million and short-term investments $118.8 million at June 30, down from $844.6 million and $213.8 million at year-end. Current assets were $3,098.1 million and current liabilities $1,385.4 million.
- Debt was approximately $5.96 billion, including $399.6 million classified as current; operating lease liabilities added $1,076.3 million. Lease liabilities were recognized following adoption of ASC 842 in January 2019, with no material income-statement or cash-flow impact from adoption.
- Dividends paid were $0.40 per share in Q2 and $0.80 per share in the first half. A further $0.40-per-share dividend was authorized July 18, payable August 22, 2019.
Changes versus prior year
- First-half sales decreased 2.9%, while copper sales volume increased 9.3%; management attributed lower revenue principally to lower metal prices. Average first-half LME copper price was $2.80 per pound, down 10.8%.
- First-half SCC-attributable net income declined 10.2%, operating income declined 9.8%, and EPS declined 10.5%. In Q2, attributable net income declined 1.8%.
- Mined copper production increased 14.2% in the first half to 1,069.2 million pounds, led by the ramp-up of the Toquepala concentrator and improved output at Buenavista. First-half molybdenum production rose 12.3% and silver 5.0%; zinc rose 1.6%.
- Operating costs and expenses increased 2.2% for the first half, principally due to higher depreciation, amortization and depletion, partly offset by lower cost of sales and exploration expense. Lower capital spending reflected completion or ramp-up of major projects.
- Q2 non-operating expense improved by $12.3 million year over year, including a $25 million insurance recovery for rain damage in Peru, partly offset by lower capitalized interest.
Outlook, risks and notable items
- Management forecast 2019 copper production of 993,300 tons, up 12.4% from 2018, and expected higher silver, zinc and molybdenum output. It described a potential 2019 refined-copper market deficit of about 350,000 tons and expected copper prices to recover in the second half. These are forward-looking estimates, not guarantees.
- Management stated it was developing a growth plan targeting copper production of 1.5 million tons by 2025. Projects include Buenavista Zinc, Pilares, and longer-term projects such as Michiquillay and Los Chancas; project timing, budgets and output depend on approvals, execution and market conditions.
- The Toquepala expansion reached full production in Q2. Tia Maria received its construction permit on July 8, after the quarter, but SCC reiterated that construction would be delayed until dialogue with neighboring communities establishes greater social support. The project budget is approximately $1.4 billion, with $335.7 million invested through June 30.
- Environmental and legal exposures include unquantified potential remediation costs at Peruvian sites; pending Tia Maria-related lawsuits; and litigation arising from the 2014 Buenavista spill. Management says it cannot currently estimate certain potential losses and considers the spill-related proceedings not expected to have a material financial effect.
- A July 9 sulfuric-acid discharge at the Guaymas terminal occurred after quarter-end. The company reported no identified environmental harm; PROFEPA later ordered a partial temporary shutdown of sulfuric-acid storage and transport at the terminal. SCC expected no operational impact at that time, citing no scheduled shipments until late August.
- The first-half asset-retirement obligation increased to $248.7 million from $217.7 million at year-end, including changes in estimates for Peruvian closure plans. A new IRS examination covering 2014–2016 began; management did not expect open U.S. tax years to require cash payment in the following 12 months.
- Market risks include volatile metal prices, foreign-exchange movements, operating costs and permitting, labor, environmental matters, litigation and political or economic conditions in Peru and Mexico. The filing reported no material changes to risk factors. Management concluded disclosure controls were effective; the independent accountant’s interim review was not an audit.
Important facts for investors to verify
- Reconcile the decline in first-half earnings with metal-price movements, cost growth and the significant working-capital use of cash.
- Track Toquepala and Buenavista production, 2019 output guidance, and the sustainability of the reported volume gains.
- Monitor copper and by-product prices, as well as cash cost per pound: reported first-half cash cost net of by-product revenue was $0.85 per pound, up 4.9% year over year (a company-defined non-GAAP measure).
- Assess liquidity and debt maturities alongside dividends, capital commitments and the new lease liabilities.
- Follow Tia Maria community engagement and project timing, environmental remediation estimates, the Guaymas shutdown, and outstanding litigation and tax matters.
- Note an inconsistency in the MD&A: one passage says first-half net income was 3.5% lower, while the financial statements show SCC-attributable net income fell 10.2% ($790.6 million versus $880.3 million). Verify the intended comparison.