Southern Copper Corporation — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing, not a standalone fourth-quarter report. The company is an integrated copper producer operating mines, smelters and refineries in Peru and Mexico; copper accounted for 80.4% of 2018 sales. Financial statements are presented in U.S. dollars and prepared under U.S. GAAP.
Financial and operating performance
| Metric | FY2018 | FY2017 | Change / context |
|---|---|---|---|
| Net sales | $7,096.7 million | $6,654.5 million | Up 6.6%; company record. Higher copper and molybdenum prices and higher silver and molybdenum sales volumes were principal drivers. |
| Operating income | $2,881.2 million | $2,618.9 million | Up 10.0%. |
| Net income attributable to SCC | $1,543.0 million | $728.5 million | Up 111.8%; comparison is heavily affected by a $785.9 million non-cash U.S. tax reform charge recorded in 2017. |
| Margins | Gross 42.5%; operating 40.6%; net 21.7% | Gross 41.0%; operating 39.4%; net 10.9% | Net margin improvement mainly reflects the tax comparison. |
| Cash from operations | $2,235.1 million | $1,976.6 million | Up $258.5 million. |
| Capital investment | $1,121.4 million | $1,023.5 million | Funded alongside dividends from operating cash and existing liquidity. |
| Cash dividends paid | $1,082.3 million; $1.40 per share | $456.1 million; $0.59 per share | FY2018 distributions absorbed a substantial share of operating cash flow. |
- FY2018 investing cash outflow was $1,296.2 million; financing cash outflow was $1,083.4 million. Cash and cash equivalents fell $160.2 million to $844.6 million. Short-term investments were $213.8 million, giving cash and short-term investments of $1,058.4 million.
- Current assets were $3,180.0 million and current liabilities $1,216.3 million; the current ratio was 2.61.
- Total debt was $5,960.1 million, essentially unchanged year over year. Debt was fixed-rate and dollar-denominated, with a weighted average interest rate of 5.89%. Net debt was $4,901.7 million; net debt to net capitalization was 42.6%, versus 44.4% in 2017.
- Operating cash cost, a non-GAAP measure, was $1.54 per pound of copper before by-product credits and $0.87 net of by-product revenues, compared with $1.49 and $0.92, respectively, in 2017.
- Mined copper production rose 0.8% to 1,948.2 million pounds. Mined silver increased 8.7%, molybdenum 3.1%, and zinc 3.1%. Buenavista SX-EW copper output fell 20.1%, partly offsetting higher production elsewhere.
- For Q4 2018, net sales were $1,694.7 million and SCC-attributable net income was $293.3 million. Q4 2017 sales were $1,864.3 million and attributable net income was a loss of $287.4 million, reflecting the 2017 tax charge.
Material changes versus the prior year
- Sales increased with higher average LME copper prices ($2.96/lb., up 5.7%) and molybdenum prices ($11.86/lb., up 45.9%); silver prices declined 8.1% and zinc prices rose 1.5%.
- Operating costs and expenses rose 4.5% to $4,215.5 million, mainly from higher fuel costs, inventory consumption and workers’ participation expense. Fuel, gas and power represented about 29% of production costs.
- The effective income tax rate declined to 40.7% from 69.2%. The 2017 rate included the provisional $785.9 million non-cash U.S. tax reform charge; the company finalized the cumulative tax reform impact at $816.8 million in 2018, including a further $30.9 million provision.
- Toquepala’s new concentrator began operating in Q4 2018; the company reported 8,630 tons of copper produced during its initial 2018 operation. The company’s $3.5 billion Mexican expansion program was reported complete and operating.
Outlook, commentary, risks and unusual items
- Management forecast 2019 copper production of 986,700 tons, about 11.7% above 2018, and approved a 2019 capital program of $1,752.8 million. It expects full Toquepala expansion production by Q2 2019 and targets 1.5 million tons of annual copper production by 2025 through future projects.
- Management’s 2019 copper-market view assumed slower global growth but not recession, demand growth near 2.5% and supply growth near 1.5%, which it expected could support prices. This is management’s outlook, not a guarantee.
- Key project dependencies include the Tia Maria construction license, which management expected in H1 2019 but which had been delayed by community opposition, and planned production restart at San Martin following rehabilitation. The San Martin restart program had a $77 million budget; Taxco remained on strike, with operations suspended since 2007.
- In Mexico, the 2014 Buenavista copper-sulfate spill resulted in $126.2 million of charges through 2017. Multiple collective, civil and constitutional actions remained pending at year-end. The company considered them without merit and stated that proceedings were not expected to have a material financial effect; outcomes and damages were not quantifiable in the filing.
- Peruvian soil characterization and remediation plans were still being developed; the company said it could not yet reasonably estimate potential costs. The 2019 environmental spending and any effect of a newly affirmed Zacatecas ecological tax were also unresolved.
- Other major risks include volatile metal prices, foreign exchange and inflation, energy and water costs or availability, labor disputes, community opposition, permitting, reserves and mine-slope or tailings-dam risks, environmental regulation, litigation, and political and regulatory conditions in Peru and Mexico.
- Grupo Mexico indirectly owned 88.9% of SCC and can control shareholder votes. SCC reported related-party purchases of $380.5 million in 2018, including power, freight, construction and support services; transactions and governance conflicts merit attention.
- Effective January 1, 2019, the new lease standard was expected to add approximately $1,115.9 million of right-of-use assets and lease liabilities to the balance sheet. The filing’s financial statements received an unqualified audit opinion; management and the auditor reported effective internal control over financial reporting.
Most important facts for investors to verify
- Whether the Toquepala expansion reached expected full production and delivered the forecast copper volume and cost benefits.
- Progress on Tia Maria permitting, community acceptance and project economics, and the actual rehabilitation and restart schedule and cost for San Martin.
- Developments and potential exposure from the Buenavista spill litigation, Peruvian soil remediation obligations and the Zacatecas ecological tax.
- Cash generation after the planned $1.75 billion 2019 capital program and dividends, and debt maturities, covenants and refinancing capacity.
- Underlying earnings and margin trends excluding the non-cash tax reform effects; also monitor metal prices, by-product credits and operating cash costs, which are non-GAAP.
- Related-party dealings, controlling-shareholder influence, and any change in dividend policy or capital allocation.