Southern Copper Corporation — FY2022 Form 10-K
Business context and reporting period. This is an annual report for the year ended December 31, 2022, not a standalone fourth-quarter filing. Southern Copper is an integrated copper producer operating mines, smelters and refineries in Peru and Mexico; it also produces molybdenum, zinc, silver, gold and other by-products. Grupo Mexico indirectly owned 88.9% of the company at year-end. Financial amounts below are U.S. dollars unless stated otherwise.
Financial and operating performance
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Net sales | $10.048 billion | $10.934 billion | Down 8.1% |
| Operating income | $4.436 billion | $6.065 billion | Down 26.9% |
| Operating margin | 44.1% | 55.5% | Calculated from reported sales and operating income |
| Net income attributable to SCC | $2.639 billion | $3.397 billion | Down 22.3% |
| Diluted earnings per share | $3.41 | $4.39 | Down $0.98 |
| Cash provided by operating activities | $2.803 billion | $4.292 billion | Down $1.490 billion |
| Capital investments | $948.5 million | $892.3 million | Up 6.3% |
| Cash dividends paid | $2.706 billion | $2.474 billion | $3.50 per share in 2022 |
Sales fell primarily because copper, molybdenum and silver volumes declined and copper and silver prices were lower. Higher molybdenum and zinc prices and higher zinc sales volumes partly offset the declines. Copper represented 75.0% of sales; molybdenum 11.9%, silver 4.0% and zinc 3.7%. The average LME copper price was $4.00/lb, down 5.4% from 2021.
- Costs and margins: Operating costs and expenses rose 15.3% to $5.612 billion. Cost of sales increased $754.7 million, with higher fuel, power, other production costs and third-party metal purchases among the drivers. Non-GAAP cash cost per pound of copper before by-product credits rose to $2.02 from $1.64; net of by-product credits it rose to $0.78 from $0.67.
- Production: Mined copper decreased 6.6% to 1,972.5 million pounds; molybdenum fell 13.3% to 57.8 million pounds; zinc fell 10.4% to 132.3 million pounds; and silver fell 2.1% to 18.6 million ounces. Copper declines were concentrated at Cuajone, Toquepala and La Caridad.
- Segments: Mexican open-pit operations generated $2.955 billion of operating income, down from $3.698 billion; Peruvian operations generated $1.468 billion, down from $2.333 billion; and IMMSA generated $60.6 million, down from $88.8 million.
Liquidity, debt and cash flow
At December 31, 2022, cash and cash equivalents were $2.070 billion and short-term investments were $208.3 million, totaling $2.278 billion. Current assets were $5.188 billion and current liabilities $1.236 billion, for a calculated current ratio of approximately 4.2. Total assets were $17.277 billion and total equity $8.147 billion.
- Debt was $6.251 billion, down from $6.548 billion at year-end 2021; debt is U.S.-dollar denominated and fixed-rate, with a weighted average interest rate of 5.82%. The $300 million notes due in 2022 were repaid; principal maturities include $500 million in 2025 and most remaining principal thereafter.
- Operating cash flow less reported capital expenditures was approximately $1.854 billion. Operating cash flow was lower year over year, notably reflecting a $718 million decrease in accounts payable and accrued liabilities, including lower accrued income taxes.
- Financing activities used $3.011 billion, principally dividends of $2.706 billion and debt repayment of $300 million. Management said it expects to fund 2023 and later cash needs with cash on hand and internally generated funds, with external financing available if needed.
Material changes, outlook and management commentary
- Net income fell 22.3% as lower sales and higher operating costs outweighed improved by-product prices. Operating cash flow declined 34.7%.
- Cuajone production was disrupted in 2022 after community members blocked the railway and seized water-reservoir facilities. The company reports that the mine, railway and related facilities are now operating at full capacity.
- Management expects 2023 copper production of 925,800 tonnes, up 3.5% from 2022; molybdenum of 22,200 tonnes, down 15.3%; silver of 20.5 million ounces, up 10.2%; and mined zinc of 116,800 tonnes, up 94.7%. These are forecasts, not guarantees.
- The board approved a 2023 capital investment program of $1.100 billion. Key plans include the Buenavista zinc concentrator, expected to start in the second half of 2023, and Pilares, already delivering oxide material to La Caridad with full-capacity concentrator feed expected in the second quarter of 2023. The company is developing a longer-term plan targeting 1.7 million tonnes of copper production by the end of the decade.
- Tia Maria remains a major proposed project: the company cites a $1.4 billion budget and 120,000 tonnes of annual copper cathode capacity, but construction depends on further government and community support. Other projects have long timelines and remain subject to development, permitting, economic and social risks.
Risks, contingencies and unusual items
- Commodity, cost and currency exposure: Results are highly sensitive to copper and by-product prices. Fuel, gas and electricity costs were about 34% of production costs in 2022. Inflation and exchange-rate movements in Peru and Mexico affect costs; both countries experienced elevated inflation in 2022.
- Operational and social risks: Ore grades, recovery, water availability, energy supply, equipment, shipping, labor relations, slope stability and tailings facilities can affect output and costs. The filing reports four employee fatalities in 2022, versus three in 2021. Taxco has been on strike since 2007; Santa Eulalia remains suspended following flooding.
- Legal and environmental matters: Litigation includes cases concerning Tia Maria and the 2014 Buenavista spill; management says outcomes or damages cannot be reliably estimated in some cases. The Guaymas sulfuric-acid terminal has a partial temporary shutdown affecting storage and transport; the company says it does not currently expect an operational impact, and the matter remained pending at year-end.
- Accounting and one-time items: The company recorded asset-retirement obligation estimate changes in 2022, including a $59.5 million decrease for Peru and a $43.3 million increase for Mexico. Non-operating income included insurance recoveries and other favorable adjustments. The external auditor issued unqualified opinions on the financial statements and internal controls; the identified critical audit matter was valuation of leach-pad ore stockpiles, reported at $1.324 billion including current and non-current amounts.
- Ownership and governance: Grupo Mexico’s controlling stake and related-party transactions may create conflicts with minority shareholders. Related-party purchases totaled $534.6 million in 2022; the filing describes review and approval procedures.
- Other: The 2022 U.S. Inflation Reduction Act includes a 1% excise tax on certain share repurchases effective in 2023. The company says it was still evaluating the impact. Its share repurchase program had no activity since 2016.
Important facts for investors to verify
- Whether 2023 production targets are achieved, especially the forecast zinc ramp-up and the recovery in Peruvian copper output.
- Actual project timing, remaining spending and permitting or community milestones for Buenavista Zinc, Pilares, Tia Maria and other growth projects.
- How copper prices, ore grades, energy costs and by-product credits affect cash costs and margins; note that reported cash-cost measures are non-GAAP.
- Cash conversion and working-capital movements, including the large 2022 reduction in accrued liabilities and income taxes payable.
- Updates on Cuajone community relations, Tia Maria litigation and social support, the Guaymas terminal matter, and other environmental and labor contingencies.
- Leach-pad inventory recoverability assumptions, debt covenants and maturities, dividend decisions, and the effect of the 2023 stock-repurchase excise tax.