Southern Copper Corporation — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011; interim financial statements are unaudited. Southern Copper mines and sells copper and by-products, with principal operations in Peru and Mexico. Amounts below are in U.S. dollars unless stated otherwise.
Financial results and liquidity
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $1,801.5 million | $1,173.2 million | $3,403.5 million | $2,392.6 million |
| Operating income | $998.7 million | $540.4 million | $1,761.5 million | $1,149.2 million |
| Net income attributable to SCC | $658.0 million | $313.4 million | $1,136.4 million | $696.6 million |
| EPS, basic and diluted | $0.78 | $0.37 | $1.34 | $0.82 |
| Operating margin | 55.4% | 46.1% | 51.8% | 48.0% |
- Q2 sales increased 53.6%; SCC-attributable net income rose 110.0%. For the six months, sales increased 42.3% and attributable net income rose 63.1%. Management attributed the gains mainly to higher metal prices and restored Buenavista production.
- Average LME copper prices rose 30.1% in Q2 and 31.9% for the six-month period versus 2010. Q2 copper sales volume increased 30.2%; six-month volume increased 20.8%. Six-month copper mined production rose 21.4% to 596.2 million pounds.
- Q2 operating cash cost was $0.367 per pound, versus $0.265; six-month cost was $0.310, versus $0.064. Excluding by-product credits, six-month cost was $1.671 versus $1.533 per pound. Management cited higher fuel, power, labor, repair and material costs, as well as lower by-product credits.
- Six-month operating cash flow was $717.8 million, down from $835.0 million. Working capital used $548.8 million, principally reflecting higher receivables and inventories and lower accounts payable and accrued liabilities.
- Six-month capital expenditures were $183.6 million, versus $168.3 million. Investing cash outflow was $340.1 million; financing cash outflow was $1,131.4 million, including $969.0 million of dividends and $148.0 million of share repurchases.
- Cash and cash equivalents were $1,453.8 million at June 30, down from $2,192.7 million at year-end 2010. Short-term investments were $225.4 million, up from $76.2 million. Together, cash and short-term investments totaled $1,679.2 million.
- Total debt was approximately $2,750.4 million, comprising $10.0 million current and $2,740.4 million long-term, compared with $2,760.4 million at year-end. Current assets were $3,271.5 million and current liabilities $697.8 million.
Material changes and operating developments
- Buenavista returned to full operating capacity following the 2007–2010 labor stoppage, supporting substantially higher Mexican open-pit sales and earnings. Repair spending through June 30 was $135.3 million; estimated total repairs were $174.0 million.
- Peruvian operating income fell 1.8% in Q2 and 8.2% for the six months, despite higher sales, as costs rose and copper and molybdenum sales volumes declined. Mexican open-pit operating income rose 369.6% in Q2 and 217.3% for six months, led by Buenavista. IMMSA operating income increased 64.9% in Q2 and 60.9% for six months.
- Molybdenum production declined 18.3% in Q2 and 14.6% for six months; mined zinc production declined 16.0% and 20.8%, respectively. The filing cites lower ore grades and recovery, and no Santa Eulalia mine production because of flooding.
- Interest expense increased year over year for the six-month period, principally due to the $1.5 billion of notes issued in April 2010. The company repurchased $5.2 million face value of Series B Yankee bonds in February 2011, paying a $1.4 million premium.
Outlook, risks and contingencies
- Management maintained 2011 copper production guidance of 630,000 tons, but increased the expected third-party copper share from 5.7% to 7.7% due to lower-than-expected Cuajone production. It expected improved Cuajone ore grades in the second half.
- 2011 production estimates were 17,500 tons of molybdenum, 85,500 tons of zinc and 13.0 million ounces of silver. Estimated 2011 capital expenditures were approximately $700 million, below the approved $1.7 billion budget, reflecting delays to Tia Maria and a revised Toquepala expansion scope.
- The $3.7 billion Buenavista growth program is intended to increase annual copper capacity from 180,000 to more than 450,000 tons, with phases expected in 2013 and 2015. Tia Maria, a proposed project exceeding $1 billion, was suspended after its environmental assessment was declared inadmissible; $442 million had been spent. Management said any impairment, if required, would not be material, but approvals and restart timing remain uncertain.
- Management described copper fundamentals as favorable but warned that U.S., European, Chinese and Japanese economic conditions could affect metal demand. Results remain highly sensitive to copper and other commodity prices, operating costs, ore grades, foreign exchange, labor, permits and political and environmental developments. A $0.01/lb copper price change was estimated to affect 2011 SCC-attributable net income by $7.5 million, before hedging effects.
- Copper hedges generated realized pre-tax losses of $44.3 million in the first half and covered an estimated 30% of remaining 2011 copper sales through collars and 32% through swaps. Provisionally priced sales were also exposed to final market pricing; management did not expect their settlement to have a material effect.
- Material contingencies include Peruvian former-employee labor-share claims for which no provision was recorded because management asserted defenses and could not reasonably estimate the amount; ongoing shareholder litigation; and environmental, labor and project risks. An Arizona lawsuit related to the Pasta de Conchos accident was dismissed, with appeal pending. San Martin and Taxco mines remained on strike; the Taxco labor ruling was under appeal.
- New Mexican environmental and collective-action provisions may facilitate challenges to permits and industrial activity. The company reported material compliance with applicable environmental laws but said future regulations or proceedings could adversely affect operations. Its San Luis Potosi smelter closure and remediation program had a $35.7 million budget, with $13.2 million spent by June 30.
- Related-party purchases totaled $41.4 million in the first half, versus $23.3 million a year earlier. The company also disclosed a $3.2 million remaining loan balance guaranteed for affiliate MexTransport. A proposed all-stock combination with parent Americas Mining Corporation remained under evaluation by an independent committee.
- The board authorized a $0.62-per-share dividend after quarter-end, payable August 31, and increased the share-repurchase authorization from $500 million to $1.0 billion. The independent accountants performed a review of interim statements, not a full audit; they reported no material modifications identified.
Important facts for investors to verify
- Whether copper prices, production volumes and by-product credits sustain the strong earnings while unit costs rise.
- Whether working-capital outflows and dividend and repurchase commitments are consistent with planned capital spending and liquidity.
- Progress on Cuajone production, Santa Eulalia restart, Buenavista expansion and the stated 2011 production and capex outlook.
- Regulatory and community developments affecting Tia Maria, including permit status, restart timing and potential impairment.
- Updates on labor-share and shareholder litigation, mine strikes, environmental obligations and the MexTransport guarantee.
- Final pricing of provisional sales, hedge settlement effects, and any developments in the proposed AMC combination.