Southern Copper Corporation — Q1 2010 Form 10-Q
Reporting period: Three months ended March 31, 2010; comparisons are with Q1 2009 unless otherwise noted. Amounts are in U.S. dollars. Interim financial statements were reviewed, not audited.
Business context and results
Southern Copper produces copper and by-products including molybdenum, zinc, silver, lead and gold. Its three operating segments are Peruvian operations, Mexican open-pit operations and Mexican underground operations (IMMSA). Results benefited substantially from higher metal prices and improved productivity, despite lower copper production and continued mine closures from labor disputes.
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Net sales | $1,219.4 million | $622.0 million | +96% |
| Operating income | $608.8 million | $144.1 million | +322% |
| Operating margin | 49.9% | 23.2% | +26.7 percentage points |
| Net income attributable to SCC | $383.2 million | $78.7 million | +$304.6 million |
| Basic and diluted EPS | $0.45 | $0.09 | +$0.36 |
| Dividends per share | $0.43 | $0.12 | +$0.31 |
Cash flow, liquidity and debt
- Operating cash flow was $307.2 million, versus cash used of $193.8 million in Q1 2009. Management attributed the improvement principally to higher earnings and a $171.7 million smaller working-capital cash outflow. Working capital still used $171.3 million.
- Capital expenditures were $75.4 million, compared with $63.5 million. Investing activities used $67.2 million, including proceeds from investment redemptions and property sales.
- Financing activities used $366.6 million, mainly the $365.5 million common dividend payment. Cash fell $120.3 million during the quarter to $652.0 million; short-term investments were $20.1 million.
- At March 31, current assets were $1,718.6 million and current liabilities $502.4 million (current ratio approximately 3.4). Total debt, including current maturities, was approximately $1,280.3 million. Debt to total capitalization was 24.7% at quarter-end.
- Subsequent to quarter-end, SCC issued $1.5 billion of senior unsecured notes: $400 million due 2020 at 5.375% and $1.1 billion due 2040 at 6.75%. Proceeds are for general corporate purposes, including capital spending. Management said the debt-to-capitalization ratio would rise to approximately 41% following the issue.
Material changes and operating drivers
- Average LME copper price rose to $3.28 per pound from $1.56; molybdenum averaged $15.78 per pound, up 80.3%. Sales growth was driven primarily by higher metal prices and higher molybdenum sales volumes.
- Copper sales volume decreased 2.9% to 257.4 million pounds. Mined copper production declined 8.8% to 240.8 million pounds, mainly due to lower planned ore grades at Cuajone and lower grades and recoveries at La Caridad. Molybdenum production increased 17.2% to 10.5 million pounds.
- Operating costs and expenses rose to $610.6 million from $477.9 million. Cost of sales increased by $123.7 million, reflecting higher workers’ participation, purchased-metal costs, fuel and power, and labor and repair costs.
- Income tax expense was $203.2 million; the effective tax rate declined to 34.5% from 37.7%. Management attributed the prior-year higher rate partly to the effect of U.S. tax on distributions from the Mexican subsidiary against a lower prior-year earnings base.
- The company reported non-GAAP operating cash cost of negative $0.147 per pound of copper produced after by-product credits, versus positive $0.598 in Q1 2009. Excluding by-product revenue and net revenue on third-party metal sales, cash cost rose to $1.504 per pound from $1.292, reflecting higher input costs and lower copper production.
Outlook, projects and key risks
- Management expected 2010 copper and molybdenum production to match 2009 levels. It approved a $2.8 billion 2010–2012 capital program, expected to add approximately 754 million pounds of annual copper capacity and 15 million pounds of annual molybdenum capacity when completed. The 2010 capital budget was $600 million in Peru and $200 million in Mexico; $75.4 million had been spent by March 31.
- Tia Maria, budgeted at $934 million and expected to produce about 260 million pounds of copper cathodes annually, remained subject to environmental approval and community review. A scheduled public hearing did not proceed amid social unrest. A technical agency was established after quarter-end to review comments over 90 days; approval was expected in Q3 2010, but timing and execution remain uncertain.
- Cananea, San Martin and Taxco remained closed during the quarter because of strikes that began in 2007. A court ruling supported termination of Cananea labor contracts, and the workers’ appeal was dismissed on April 21, 2010. SCC said it expected to regain access and was prepared to restart Cananea, but timing was not assured. Management reported no impairment at Cananea as of March 31; that assessment could change if expected metal prices decline significantly.
- SCC announced the closure of the San Luis Potosi copper smelter in March 2010, citing remediation and environmental standards; the zinc refinery was unaffected. The company expected La Caridad to replace the smelter’s copper capacity.
- Key exposures include volatile copper and by-product prices, fuel and electricity costs, exchange rates, labor disruptions, project permitting and community opposition, environmental requirements, and operational and geological risks. Management’s price sensitivities estimate annual SCC net income changes of $5.7 million per $0.01/lb copper move, $24.3 million per $1/lb molybdenum move, $1.3 million per $0.01/lb zinc move, and $9.0 million per $1/oz silver move, assuming production and other stated assumptions hold.
- Peruvian labor-share lawsuits seek substantial shares and dividends. SCC made no provision, citing defenses and inability to reasonably estimate the contingency. Other disclosed matters include a U.S. lawsuit by widows of miners killed at Pasta de Conchos and a dispute concerning the Excomet acquisition; SCC said it would defend these claims.
- Related-party transactions included $12.6 million of purchases in Q1 2010 versus $6.3 million a year earlier. Mexican subsidiaries also guaranteed loans for an affiliate-controlled aviation company; the remaining guaranteed loan balance was $4.8 million at March 31.
Important facts for investors to verify
- Whether higher metal prices and the resulting earnings and cash flow are sustainable, given lower copper output and increased cash costs before by-product credits.
- Use of the $1.5 billion bond proceeds, resulting leverage, interest burden, and effect on future capital spending and dividends.
- Progress and final approval of the Tia Maria environmental review, community response, and project schedule and cost.
- Actual access and restart timing at Cananea, status of the Taxco and San Martin strikes, and any resulting production or impairment effects.
- Developments and potential financial exposure from labor-share claims and other litigation; management states that the labor-share contingency cannot be reasonably estimated.
- Execution of the $2.8 billion capital program and whether projected production increases and cost benefits are achieved.