Southern Copper Corporation — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. Southern Copper is a copper producer operating principally in Peru and Mexico; its other metals include molybdenum, silver and zinc. Interim financial statements are unaudited and were reviewed by the independent accountants, who reported no material modifications needed for U.S. GAAP conformity.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $1.552bn | $1.746bn | $5.018bn | $5.149bn |
| Operating income | $448m | $962m | $2.296bn | $2.724bn |
| Net income attributable to SCC | $218m | $663m | $1.403bn | $1.799bn |
| EPS, basic and diluted | $0.26 | $0.78 | $1.65 | $2.10 |
| Operating cash flow | $662m | $878m | $1.760bn | $1.596bn |
| Capital expenditures | $258m | $153m | $666m | $337m |
Sales fell 11.1% in Q3 and 2.5% for the nine months, mainly reflecting weaker metal prices. Nine-month average LME copper was $3.61/lb, down 14% year over year; molybdenum, zinc and silver averages also declined. Copper sales volume rose about 10% for the nine months, and copper production increased 11.2%; higher volume partly offset lower prices. Nine-month operating margin was about 45.8%, versus 52.9% in 2011; reported Q3 operating margin was 28.8%, versus 55.1%, heavily affected by the unusual legal-fee charge below.
Reported results included $316.2m of legal fees and expenses related to the AMC damage award, recorded in Q3 operating expenses. Excluding that charge only, Q3 operating income would have been about $764m; this is a simple arithmetic illustration, not a company-reported adjusted measure. Nine-month effective tax rate was 38.2%, up from 30.5%, partly due to the award-related fees and Peru’s special mining tax.
Balance sheet, liquidity and capital
- At September 30, cash and cash equivalents were $1.158bn; short-term investments were $380m. Current assets were $5.290bn and current liabilities $1.104bn. The current-assets figure includes a $2.108bn damage-award receivable.
- Total debt was approximately $2.741bn, nearly all long-term; long-term debt fair value was reported at $3.284bn. Total equity was $6.601bn.
- Nine-month operating cash flow increased to $1.760bn from $1.596bn, with working capital providing a $70m cash source versus a $318m use in 2011. Investing used $500m and financing used $953m.
- Cash dividends paid in the first nine months were $814m, and share repurchases were $132m. The filing reports a subsequent quarterly dividend of “$2.75 per share,” expected to total $2.325bn; this amount is unusual relative to the reported earnings and should be verified.
Material changes and unusual items
- On October 9, 2012, AMC, SCC’s majority shareholder, paid $2.108bn in satisfaction of the Delaware judgment concerning the 2005 Minera Mexico merger. SCC paid $316.2m in attorneys’ fees. At September 30, the award was recorded as a receivable and credited to capital accounts, with the fee recorded as expense and an accrued liability; the cash payment occurred after quarter-end.
- Nine-month operating cash costs per pound of copper, including by-product credits, increased to $0.65 from $0.45; excluding by-product credits, the measure was $1.77 versus $1.74. The company identifies this as a non-GAAP measure.
- Capital spending accelerated to $666m for the nine months, including $410m on Buenavista projects. Cash and short-term investments together were about $1.54bn at quarter-end, before the subsequent award cash receipt and the declared dividend payment.
Outlook, commentary and risks
- Management maintained 2012 production guidance of 640,000 metric tons of copper, including 2.5% purchased from third parties; it expected about 17,200 tons of molybdenum and zinc and silver production around 2011 levels. It expected 2012 capital expenditures of $1.0bn.
- Major projects include Buenavista’s expansion, with a $1.4bn budget and expected start-up in the first half of 2015; Toquepala and Cuajone expansions; and other projects. Project schedules, costs and outputs are estimates and depend on approvals and execution.
- Tia Maria, a proposed investment exceeding $1bn, remained suspended after protests and governmental action. SCC was preparing a new environmental impact assessment and rescheduled planned operations to 2015, subject to approvals; management gave no assurance on approval timing.
- Management cited uncertain metal prices and macroeconomic conditions, especially European weakness and China’s outlook. Risks also include cost inflation, fuel and power prices, currency movements, ore grades, permitting, environmental matters, labor relations, litigation and political risks in foreign operations.
- Peruvian collective bargaining agreements expired during 2012; negotiations were expected to continue into the first quarter of 2013. Mexican San Martin and Taxco mine labor disputes remained unresolved, with potential operational impacts.
- Peruvian former-worker labor-share lawsuits involve substantial claims that management said could not be reasonably estimated; no provision was recorded. Other pending matters include appeals and litigation concerning Tia Maria concessions and the Pasta de Conchos accident. SCC stated it believed other proceedings would not materially affect its financial position or results.
- The company reported disclosure controls effective as of September 30, 2012 and no material change in internal control over financial reporting during the quarter. No material changes to risk factors were reported.
Most important facts to verify
- Confirm the declared dividend amount: the filing states $2.75 per share and an expected aggregate of $2.325bn, despite Q3 EPS of $0.26; verify against the dividend announcement and payment records.
- Verify the timing and accounting of the $2.108bn AMC award receipt and $316.2m legal-fee payment, including the treatment of the quarter-end receivable and capital-account credit.
- Assess how much of operating cash flow and reported liquidity reflects working-capital timing and the award receivable, rather than recurring operating performance.
- Track copper and by-product prices, production and cash costs against management’s 2012 guidance, and execution and spending on major expansion projects.
- Monitor Tia Maria approvals, labor negotiations and strikes, and the exposure and status of the unprovided Peruvian labor-share claims.