Southern Copper Corporation — Q2 2020 Form 10-Q
Business context and reporting period. Southern Copper is an integrated copper and other-minerals producer operating primarily in Peru and Mexico, with exploration activities in several Latin American countries. This unaudited quarterly report covers the three and six months ended June 30, 2020; comparisons below are with the corresponding 2019 periods unless otherwise noted. Grupo Mexico indirectly owned 88.9% of the company. The independent accountant performed a review of interim financial information, not a full audit.
Financial and operating performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $1,785.4 million | $1,818.0 million | $3,505.1 million | $3,571.4 million |
| Operating income | $577.2 million | $713.6 million | $1,110.4 million | $1,407.3 million |
| Net income attributable to SCC | $259.5 million | $402.4 million | $474.3 million | $790.6 million |
| Diluted earnings per share | $0.34 | $0.52 | $0.61 | $1.02 |
| Net cash from operating activities | $419.3 million | $414.1 million | $894.5 million | $785.3 million |
| Capital expenditures | $113.3 million | $180.4 million | $214.3 million | $353.5 million |
- Margins: Operating margin was approximately 32.3% in Q2 versus 39.3% a year earlier; the six-month margin was 31.7% versus 39.4%. Net margin attributable to SCC was approximately 14.5% in Q2 versus 22.1%, and 13.5% for the first half versus 22.1%.
- Cash costs: Management’s non-GAAP operating cash cost per pound of copper, net of by-product revenues, was $0.67 in Q2 versus $0.81 and $0.72 for the first half versus $0.85.
- Production and sales: Q2 mined copper production was 558.1 million pounds, down 1.3%; copper sales volume rose 11.0% to 595.9 million pounds. For the first half, mined copper production rose 2.1%, molybdenum 26.4% and silver 17.3%; zinc production fell 3.7%.
Liquidity, debt and financial position
- At June 30, cash and cash equivalents were $1,808.8 million, down from $1,925.1 million at December 31, 2019; short-term investments were $30.7 million, versus $80.7 million.
- Current assets were $3,859.7 million and current liabilities $891.8 million, for a reported current ratio of 4.33. Total assets were $15,805.0 million.
- Long-term debt was $6,542.6 million, compared with $6,541.0 million at year-end; no current portion of long-term debt was reported at June 30. The company repaid $400 million of 2010 bonds in April and stated it had no other major debt maturity until 2022. Lease liabilities totaled $1,011.2 million.
- First-half financing cash outflow was $866.2 million, including $463.8 million of common dividends and the $400 million debt repayment. Dividends paid were $0.60 per share in the first half versus $0.80 in 2019.
Material changes and drivers
- Q2 sales fell 1.8% and first-half sales fell 1.9%. Lower metal prices—notably copper, molybdenum and zinc—were partly offset by increased sales volumes. Q2 average LME copper price was $2.42 per pound, down 12.6%; molybdenum averaged $8.24 per pound, down 32.1%.
- Operating costs and expenses increased 9.4% in Q2 and 10.7% for the first half. Management cited increased third-party metal purchases, higher inventory consumption and lower capitalization of leachable material; COVID-related costs were $10.5 million through June 30.
- First-half net income attributable to SCC declined 40.0%. The effective income tax rate increased to 48.2% from 38.1%, primarily due to foreign-exchange movements in the Mexican peso and Peruvian sol. Higher interest expense also weighed on results.
- Operating cash flow increased year over year in the first half, helped by changes in operating assets and liabilities, including inventory reductions; reported earnings were substantially lower.
- A prospective accounting-estimate change for leach-pad inventory took effect January 1, 2020. The filing reports a $48.8 million decrease in capitalized material and a $10.3 million increase in consumption from the change.
Outlook, risks and contingencies
- Production outlook: Management expected 2020 production of 997,100 tons of copper, 28,500 tons of molybdenum, 22.7 million ounces of silver and 78,600 tons of zinc. These are forward-looking estimates, not guarantees.
- COVID-19: Facilities were operating at approximately 96% of production capacity at June 30. Management reported no major delays in critical supplies, shipments or collections to that date, but said the pandemic’s full financial and operational effect remained uncertain. Exploration activity was reduced in Argentina and Chile; Ecuador exploration resumed late in Q2.
- Projects and investment: First-half capital investment was $214.3 million. The company reported approximately $417 million committed to capital projects. Major project timing remains subject to market conditions and the pandemic. Tia Maria, a proposed $1.4 billion project, had its construction permit ratified in 2019; $340.9 million had been invested through June 30, 2020, but construction remained exposed to opposition and litigation.
- Legal and environmental matters: Tia Maria lawsuits and a Pasto Grande tailings-dam property dispute in Peru remained pending, with potential losses not reasonably estimable. Multiple lawsuits related to the 2014 Buenavista spill remained pending; management said the proceedings were not expected to have a material effect, while also stating damages could not then be determined. The partial temporary shutdown concerning sulfuric-acid storage and transport at the Guaymas terminal remained unresolved; the company did not expect an operational impact.
- Other risks highlighted include volatile metal prices, foreign-exchange exposure, supply-chain or workforce disruptions, permitting, labor issues, environmental obligations and litigation. Management reported no impairment indicators at June 30.
- Subsequent dividend: On July 23, the board authorized a $0.40-per-share dividend payable August 25, 2020.
Most important facts for investors to verify
- Whether metal prices, especially copper, and realized sales volumes support the stated production and earnings outlook.
- Whether higher operating costs, third-party purchases and leach-pad inventory accounting continue to pressure margins and cash generation.
- COVID-related operating capacity, workforce availability, supply conditions and the realization of the company’s production forecasts.
- Debt-service and dividend capacity after the $400 million repayment, ongoing capital commitments and the declared $0.40-per-share dividend.
- Developments in Tia Maria permitting/opposition and the disclosed Peruvian, Buenavista-spill and Guaymas matters, including any change in estimated exposure or operating impact.
- Progress, costs and schedules for major growth projects, and whether the approximately $417 million of capital commitments or broader project plans change.