Southern Copper Corporation — FY 2015 Form 10-K
Reporting period: Year ended December 31, 2015. The filing is an annual report, not a standalone fourth-quarter report; quarterly figures are included below. Southern Copper is an integrated copper producer operating in Peru and Mexico, with exploration activities in several other Latin American countries.
Financial and operating results
Amounts are in U.S. dollars unless noted. Financial results weakened substantially as metal prices fell, despite record copper output and higher sales volumes.
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net sales | $5,045.9 million | $5,787.7 million | Down 12.8% |
| Operating income | $1,414.4 million | $2,232.7 million | Down $818.3 million |
| Net income attributable to SCC | $736.4 million | $1,333.0 million | Down 44.8% |
| Basic and diluted EPS | $0.93 | $1.61 | Down $0.68 |
| Operating cash flow | $879.8 million | $1,355.9 million | Down $476.1 million |
| Capital expenditures (cash-flow statement) | $1,149.6 million | $1,529.8 million | Down $380.2 million |
- Margins: Gross margin was 31.9%, versus 43.2% in 2014; operating margin was 28.0%, versus 38.6%; net margin was 14.6%, versus 23.0%.
- Production and sales: Copper mine production reached a record 1,638.0 million pounds, up 9.8%; management separately reports 742,993 metric tons of copper production. Copper sales rose 12.3% to 1,625.8 million pounds. Molybdenum production was up 1.0%; zinc production fell 7.1%; silver production rose 2.3%.
- Prices: Average LME copper price fell 19.6% to $2.50 per pound. Average molybdenum, silver and zinc prices fell 41.7%, 17.6% and 10.2%, respectively.
- Cash cost: Management’s non-GAAP operating cash cost was $1.66 per pound without by-product credits (down from $1.89) and $1.12 with by-product credits (up from $1.07). Lower by-product prices reduced credits.
- Liquidity and debt: Cash and equivalents were $274.5 million, short-term investments $603.5 million and restricted cash $4.3 million. Current assets were $2,484.2 million and current liabilities $920.2 million (current ratio 2.70). Debt was $5,951.5 million, up from $4,180.9 million; net debt was $5,073.5 million. Net debt to net capitalization increased to 48.9% from 37.3%. Debt was dollar-denominated and fixed-rate, with a weighted average rate of 5.89%.
- Capital returns: Dividends paid were $0.34 per share, down from $0.46. The company repurchased 36.7 million shares for $1,004.4 million in 2015. The board later declared a $0.03-per-share dividend for March 2016.
- Fourth quarter: 2015 Q4 sales were $1,254.6 million, operating income $187.5 million and net income attributable to SCC $60.9 million, compared with $1,471.3 million, $525.5 million and $348.0 million, respectively, in Q4 2014.
Material changes versus prior year
- Sales and earnings fell chiefly because of lower metal prices; higher copper and zinc sales volumes only partly offset the decline. Operating costs rose 2.2% to $3,631.5 million, including higher production-related costs and depreciation, partly offset by lower remediation and exploration expense.
- Buenavista drove much of the copper production increase: its copper output rose 25.8%, supported by higher concentrator throughput and SX-EW III production. The new Buenavista concentrator began operating in 2015 and was ramping up.
- Operating cash flow declined, while the increase in long-term leach-pad inventory reduced cash generation. Cash and equivalents declined by $89.5 million during 2015.
- Debt increased following the April 2015 issuance of $2.0 billion of senior unsecured notes. The company used financing and operating resources alongside substantial share repurchases and capital investment.
- The company acquired the El Pilar mining property for $100 million and recorded preliminary goodwill of $24.4 million; purchase-price allocation remained subject to finalization.
Outlook, risks and unusual items
- Management outlook: Forecast 2016 copper production of 903,300 metric tons, up 21.6% from 2015; molybdenum production of 21,800 tons, down 6.6%; silver production of 16.0 million ounces, up about 20.3%; and zinc mine production of 86,900 tons, up 40.4%. These are forward-looking estimates, not guarantees.
- Investment plans: The board approved a 2016 capital investment program of $1,577.8 million. Plans include completing Buenavista expansion work, starting construction of the Toquepala concentrator expansion, and investment in Tia Maria. Management targets copper production capacity of 1.2 million tons by 2018, subject to execution, permits and other conditions.
- Tia Maria: The project’s environmental impact assessment was approved, but its construction permit was delayed amid community opposition. The proposed project requires about $1.4 billion of investment and is designed for 120,000 tons of annual copper cathode production. Timing and eventual approval remain uncertain.
- Buenavista spill: A 2014 copper-sulfate solution spill into rivers led to remediation and legal proceedings. The company recorded remediation charges of $45.0 million in 2015 and $91.4 million in 2014; it committed up to 2 billion pesos to a remediation and compensation trust, with about 1 billion pesos contributed by year-end 2015. Some lawsuits and a criminal complaint remained pending; the company stated it could not determine the extent of damages sought in certain cases.
- Other contingencies: Peruvian former workers’ labor-share litigation remains unresolved; management said the potential amount could not be reasonably estimated. Environmental compliance costs in Peru, including air-quality and soil standards, also could not be meaningfully estimated pending government direction and further studies. Asset retirement obligations were $190.9 million.
- Operational and market risks: Results are highly sensitive to copper and by-product prices, energy costs, exchange rates, ore grades, production performance, water availability and mine safety. Taxco and San Martin mines in Mexico had remained on strike since 2007; operations there were suspended. In 2015 the company reported one employee fatality in Mexico.
- Governance and related parties: Grupo Mexico indirectly owned 88.6% of SCC. The company reports substantial related-party dealings, including power purchases from a Grupo Mexico affiliate; minority-shareholder interests may not always align with the controlling shareholder’s.
- Controls and audit: Management and the independent auditor concluded internal control over financial reporting was effective at December 31, 2015. A material weakness identified in 2014 related to access controls in the former Mexican ERP system; the company reported remediation through SAP implementation. The auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether forecast copper production and the expected ramp-up of Buenavista projects are achieved, and how much incremental output contributes to cash costs and margins.
- Whether metal prices and by-product credits recover or continue to pressure revenue, earnings and cash generation.
- Funding capacity for the planned capital program alongside higher debt, contractual commitments and the dividend and repurchase policies.
- Progress, costs and legal exposure from the Buenavista spill, and resolution of Tia Maria permitting and community issues.
- Developments in the Peruvian labor-share litigation, environmental contingencies, and the long-standing Taxco and San Martin strikes.
- Final valuation of the El Pilar acquisition and ongoing effectiveness of remediated financial-reporting controls and related-party oversight.