Business Context and Reporting Period
Company: Southern Copper Corporation (SCC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
Business Overview: SCC is primarily engaged in the production and sale of copper, along with by-products including molybdenum, zinc, silver, lead, and gold. Operations are divided into three segments: Peruvian open-pit operations, Mexican open-pit operations, and Mexican underground operations (IMMSA unit).
Key Financial Metrics
| Metric (in millions, except per share) | Q1 2009 | Q1 2008 |
|---|---|---|
| Net Sales | $622.0 | $1,499.2 |
| Operating Income | $144.1 | $864.7 |
| Net Income Attributable to SCC | $78.7 | $565.0 |
| Earnings Per Share (Basic & Diluted) | $0.09 | $0.64 |
| Operating Cash Flow | ($194.3) Used | $501.2 Provided |
| Cash and Cash Equivalents | $291.3 | $716.7 (Dec 31, 2008) |
| Total Debt (Long-term + Current) | $1,290.0 | $1,289.9 (Dec 31, 2008) |
| Debt to Total Capitalization | 28.1% | 27.5% (Dec 31, 2008) |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 58.5% to $622.0 million, driven primarily by a 55.9% drop in average copper prices (LME) and reduced production volumes.
- Profitability Drop: Net income attributable to SCC fell 86% to $78.7 million due to lower metal prices and production losses.
- Production Impact: Mine copper production decreased 6.3% to 264.1 million pounds. The decline was largely attributed to the ongoing strike at the Cananea mine in Mexico, which eliminated all production at that site for the quarter.
- Cash Flow Reversal: Operating cash flow swung from a positive $501.2 million in Q1 2008 to a negative $194.3 million in Q1 2009. This was caused by lower net income and a significant increase in working capital needs, specifically a $250.5 million decrease in accounts payable and accrued liabilities (including worker participation payments).
- Cost Reductions: Operating costs decreased $156.6 million, aided by lower fuel/power costs and reduced worker participation provisions due to lower earnings.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Market Conditions: Management notes signs of the end of the destocking stage and new demand in Asia, with copper prices rising significantly in late April 2009 compared to year-end 2008.
- Capital Expenditures: The 2009 capital and exploration budget was reduced from $415.3 million to $328.0 million. Most new expansion projects have been suspended or reevaluated due to the economic environment.
- Dividends: A quarterly dividend of 11.7 cents per share was paid in March 2009. A subsequent dividend of 4.5 cents per share was authorized for payment in June 2009.
- Share Repurchases: The company purchased 4.9 million shares for $71.6 million under its $500 million repurchase program. Additionally, parent company Grupo Mexico purchased 4.9 million shares, bringing its indirect ownership to 80%.
Risks and Contingencies
- Labor Disputes: The Cananea mine strike (ongoing since July 2007) resulted in a court-approved termination of labor contracts in April 2009 due to force majeure and severe equipment damage. Significant reconstruction costs are expected. Strikes at Taxco and San Martin mines also continue.
- Asarco Litigation: A U.S. District Court ordered AMC (Grupo Mexico's subsidiary) to return approximately 30.6% of SCC shares to Asarco LLC and pay associated dividends. Grupo Mexico intends to appeal. This creates uncertainty regarding ownership and potential financial obligations.
- Tax Implications: With Grupo Mexico's 80% ownership, SCC is now included in AMC's consolidated U.S. federal tax return. This exposes SCC to joint and several liabilities for the group's taxes and potential limitations on tax credits.
- Commodity Price Volatility: Net income is highly sensitive to metal prices. A $0.01 change in copper price impacts annual net income by approximately $6.0 million.
Investor Verification Checklist
- Cananea Mine Status: Verify the timeline and cost estimates for repairing damages and resuming operations at the Cananea mine following the labor contract termination.
- Asarco Litigation Outcome: Monitor the appeal process regarding the court order to return 30.6% of shares to Asarco, as this could materially alter ownership structure and capital.
- Consolidated Tax Liability: Review the final tax sharing agreement with AMC to understand SCC's exposure to the consolidated group's U.S. tax liabilities.
- Capital Budget Execution: Track the execution of the reduced $328.0 million capital budget and the status of suspended projects like Tia Maria and Toquepala expansion.
- By-Product Pricing: Monitor prices for molybdenum, zinc, and silver, as their significant price drops in Q1 2009 materially reduced the credit against operating cash costs.