Southern Copper Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparisons are with Q1 2013 unless stated otherwise. Southern Copper is an integrated copper and metals producer operating principally in Peru and Mexico. Grupo Mexico indirectly owned 82.5% of the company.
Financial and operating performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $1,354.4 million | $1,623.0 million | Down 16.5% |
| Operating income | $562.9 million | $774.0 million | Down 27.3% |
| Net income attributable to SCC | $323.4 million | $495.4 million | Down 34.7% |
| Diluted earnings per share | $0.39 | $0.59 | Down $0.20 |
| Operating cash flow | $334.8 million | $594.5 million | Down $259.7 million |
| Capital expenditures | $323.7 million | $316.8 million | Up $6.9 million |
- Operating margin was approximately 41.6%, versus 47.7% in Q1 2013. The lower result primarily reflected weaker metal prices and lower copper and silver sales volumes; cost reductions partly offset the sales decline.
- Average LME copper price fell 11.4% to $3.19 per pound; silver fell 31.9% to $20.46 per ounce and molybdenum fell 12.0% to $9.93 per pound. Zinc averaged $0.92 per pound, unchanged.
- Copper sales volume decreased 4.2% to 330.1 million pounds, partly due to temporary inventory accumulation. Mine copper production increased 9.2% to 359.7 million pounds; molybdenum production rose 15.7%, silver 8.6%, while zinc fell 11.3%.
- Operating cash cost per pound, excluding by-product revenues, was $1.87 versus $1.89. Including by-product revenues, it increased to $1.02 from $0.87, chiefly because lower by-product prices reduced the credit against costs. This is a company-defined non-GAAP measure.
- Cash and cash equivalents were $1,473.1 million at quarter-end, down from $1,672.7 million at December 31, 2013; short-term investments were $273.0 million. Current assets were $3,389.4 million and current liabilities $852.9 million. Long-term debt was $4,205.2 million, essentially unchanged from year-end.
- Cash flow from operations less capital expenditures was approximately $11.0 million, compared with $277.7 million in Q1 2013. Investing activities used $388.2 million and financing activities used $152.5 million. Cash dividends paid were $100.0 million, and $52.5 million was spent repurchasing shares.
Material changes and notable items
- Revenue declined $268.6 million, mainly due to lower copper and by-product prices and lower copper and silver sales. Operating costs and expenses decreased $57.5 million; management attributed this largely to lower third-party metal costs and inventory effects.
- The effective tax rate rose to 39.1% from 32.8%. The new Mexican mining royalty, effective January 2014, was a principal factor; the filing reports $24.0 million of Mexican royalty taxes in the financial statement note and $26.7 million in MD&A, a difference investors may wish to reconcile. The income-tax provision also includes royalty taxes.
- Asset retirement obligations increased to $152.0 million from $124.8 million at year-end, including a $26.7 million estimate change. The company also increased the San Luis Potosi remediation budget by $26.7 million, to $62.4 million.
- The company adopted accounting updates on joint and several obligations, foreign-currency translation adjustments, and uncertain tax benefits; it reported no material impact from the first two and presented applicable uncertain tax positions net against deferred tax assets.
Outlook, projects, and risks
- Management forecast 2014 mine copper production of 672,400 tons, molybdenum production of 21,500 tons, silver production and sales of 16.3 million ounces, and zinc production of 95,200 tons. These are forecasts, not guarantees.
- Management expected the Buenavista SX-EW III plant to begin commercial production by June 2014 and produce 53,400 tons of copper in 2014. It targeted expansion of copper capacity to approximately 1.175 million tons by 2017. The Buenavista concentrator project was reported 71.5% complete and expected to finish in the first half of 2015.
- Tia Maria remained subject to environmental approval and community-related uncertainty. The company expected approval of its revised environmental study by the end of Q2 2014 and targeted production startup in late 2016, while cautioning that timing was not assured. Toquepala expansion environmental approval was expected in Q3 2014, also without assurance.
- Major exposures include volatile copper and by-product prices, operating costs, foreign exchange, permitting and environmental compliance, labor relations, and political and legal risks. The company estimated that, for the remaining nine months of 2014, a $0.01-per-pound copper price change would affect SCC net earnings by about $6.8 million, assuming stated production, sales, and tax assumptions.
- Contingencies include Peruvian former-worker labor-share lawsuits involving roughly 900 plaintiffs in the principal case and other related claims. The company recorded no provision, stating the amount could not be reasonably estimated and that it had defenses. Other disputes concern Tia Maria concessions and the Pasto Grande tailings dam. The company is also dealing with long-running strikes at the San Martin and Taxco mines; operations there were expected to remain suspended pending resolution.
- Peruvian environmental requirements call for review and planning related to sulfur-dioxide air-quality standards at Ilo, with a modification plan due by April 8, 2015, and identification and reporting of potentially contaminated soil sites. The company stated it believed its facilities were in material compliance.
Most important facts for investors to verify
- Whether planned production, ramp-ups, and expansion schedules were achieved, particularly at Buenavista, Tia Maria, and Toquepala.
- How metal prices, sales volumes, inventory accumulation, and by-product prices affect realized margins and operating cash flow.
- The amount and timing of any liability from labor-share litigation, environmental remediation, or other contingencies; management says some outcomes cannot be reliably estimated.
- The basis for the differing Mexican royalty-tax amounts disclosed in the financial statement note and MD&A.
- Funding needs for the capital program relative to cash generation, debt, dividends, and share repurchases. The interim financial statements were reviewed by the independent accountant, not audited.