Southern Copper Corporation — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; comparative periods are the corresponding 2015 periods. Southern Copper is an integrated copper and other-metals producer operating primarily in Peru and Mexico. Figures below are in U.S. dollars; financial-statement amounts are in millions unless noted. Interim statements are unaudited and were reviewed by the independent accountant.
Key financial metrics
| Metric | Q2 2016 | Q2 2015 | H1 2016 | H1 2015 |
|---|---|---|---|---|
| Net sales | $1,335.1 | $1,382.9 | $2,580.1 | $2,657.7 |
| Operating income | $385.1 | $503.1 | $731.2 | $940.0 |
| Net income attributable to SCC | $221.9 | $294.7 | $407.0 | $577.2 |
| Diluted earnings per share | $0.29 | $0.37 | $0.53 | $0.72 |
| Operating cash flow | $264.6 | $330.8 | $328.8 | $555.2 |
| Capital investments | $341.6 | $281.0 | $564.9 | $529.8 |
- Margins: Q2 operating margin was approximately 28.8% versus 36.4% a year earlier; H1 was approximately 28.3% versus 35.4%. These are calculated from reported sales and operating income.
- Cash and liquidity at June 30: Cash and equivalents were $452.5; short-term investments were $98.2; current assets were $2,352.2 and current liabilities $798.7. At December 31, 2015, cash was $274.5 and short-term investments $603.5.
- Debt: Long-term debt was $5,952.9, essentially unchanged from $5,951.5 at year-end 2015. Reported fair value was $6,033.7.
- Cash generation and uses: H1 operating cash flow fell $226.4 year over year. Capital spending exceeded operating cash flow by $236.1. Investing cash use was $22.0, including $564.9 of capital investment and $505.3 of net proceeds from short-term investments. Financing used $115.3, including $61.9 in dividends and $53.7 in share repurchases.
- Dividend: H1 dividends paid were $0.08 per share versus $0.20 in H1 2015. A $0.05-per-share quarterly dividend was declared after quarter-end, payable August 25, 2016.
Material changes versus prior comparable periods
- Q2 sales declined 3.5%, operating income 23.5%, and SCC-attributable net income 24.7%. For H1, sales declined 2.9%, operating income 22.2%, and attributable net income 29.5%.
- Lower metal prices weighed on revenue: H1 average LME copper price fell 20.8%, molybdenum 23.3%, and zinc 16.5%. Increased copper, silver, and zinc volumes partly offset the price pressure.
- H1 copper production rose 25.5% to 986.6 million pounds, led by Buenavista’s new concentrator. Silver production increased 26.6% and zinc 30.3%; molybdenum production declined 6.4%.
- Operating costs and expenses rose 7.6% in H1, primarily from higher Mexican sales volumes and higher depreciation, amortization, and depletion as expanded Buenavista facilities entered operations. H1 depreciation, amortization, and depletion increased to $299.8 from $242.3.
- H1 operating cash cost per copper pound declined to $1.41 from $1.67 before by-product credits, and to $0.94 from $1.05 after by-product credits. These are company-defined non-GAAP measures.
- H1 net interest expense increased, reflecting the 2015 $2 billion bond issuance and reduced capitalization of interest as Buenavista projects entered service. The effective H1 tax rate was 32.7%, versus 33.3%.
Outlook, commentary, risks, and unusual items
- 2016 production outlook: Management targeted 913,500 metric tons of copper, 22,800 tons of molybdenum, 16.0 million ounces of silver, and 86,900 tons of zinc. Copper target was 22.9% above 2015 production. Management cited operating improvements, currency depreciation, lower fuel costs, and investments as cost and production supports.
- Projects: Buenavista’s new concentrator had completed ramp-up and was operating at 105% of design capacity; the Quebalix IV project was 98% complete and expected by Q3 2016. The $1.2 billion Toquepala expansion was expected to complete in Q2 2018. Tia Maria, budgeted at about $1.4 billion with $362.5 million invested, remained delayed pending construction permits and community resolution; the company could not assure timing.
- Capital obligations: The company reported approximately $2.302 billion committed to capital projects. A new Kallpa power purchase agreement added estimated obligations of $1.8 million in 2017, $13.8 million in 2018, and $368.8 million thereafter, based on estimated energy costs and usage.
- Commodity and currency exposure: Results are sensitive to metal prices, fuel and electricity costs, and Peruvian sol and Mexican peso movements. Management estimated that, for the remaining six months of 2016, a $0.10/lb copper-price change would change net income by $67.7 million, assuming stated production, sales, and tax assumptions. Provisional copper and molybdenum sales remain exposed to final pricing; management said the expected final adjustment was not material.
- Environmental and legal matters: The 2014 Buenavista spill resulted in an estimated $136.4 million in damages; $41.1 million had been paid from company funds and approximately $74.9 million deposited in a remediation trust. A $1.7 million fine was imposed. Related criminal, collective, civil, and constitutional proceedings remained ongoing; the company considered them without merit and did not expect a material financial effect. Peruvian air-quality and soil-remediation contingencies remained unquantifiable. Labor-share litigation in Peru also remained unresolved, with no provision recorded because the company asserted defenses and could not reasonably estimate exposure.
- Other items: A restructuring begun in Q1 included severance packages accepted by 223 employees; final cost was not known, though management expected any provision to be immaterial. Two Mexican mines remained suspended amid long-running strikes. The company reported no material changes to risk factors and said disclosure controls were effective.
Important facts for investors to verify
- Whether lower copper and by-product prices continue to offset production growth, and whether 2016 production targets are achieved.
- Whether higher costs, depreciation, and working-capital needs constrain cash generation while capital spending remains elevated.
- Progress, remaining budget, and operating performance at Buenavista, Toquepala, and the delayed Tia Maria project; also the ability to fund committed capital projects.
- Debt service and interest burden, including the terms and maturities of outstanding notes, and cash available after dividends and investment spending.
- Developments in the Sonora spill proceedings and remediation, Peruvian environmental contingencies, and Peruvian labor-share litigation, whose potential costs are not clearly estimable in the filing.