Business context and reporting period
Southern Copper Corporation’s Form 10-K covers the fiscal year ended December 31, 2011, with comparisons to 2010 and 2009. The company is an integrated copper producer, with mining, smelting and refining operations primarily in Peru and Mexico. It also produces molybdenum, zinc, silver, gold and other products. Grupo Mexico indirectly owned 80.9% of the company at year-end.
The filing also reports fourth-quarter results. Unless noted otherwise, financial amounts below are U.S. dollars.
Key financial and operating metrics
| Metric | 2011 | 2010 | Change or context |
|---|---|---|---|
| Net sales | $6,818.7 million | $5,149.5 million | Up 32.4% |
| Operating income | $3,625.4 million | $2,604.2 million | Up 39.2% |
| Net income attributable to SCC | $2,336.4 million | $1,554.1 million | Up 50.3% |
| EPS, basic and diluted | $2.76 | $1.83 | Up from $1.09 in 2009 |
| Operating cash flow | $2,070.2 million | $1,920.7 million | Working capital used $421.6 million in 2011 |
| Capital expenditures | $612.9 million | $408.7 million | Operating cash flow less capex: $1,457.3 million |
| Dividends paid | $2,080.4 million | $1,428.0 million | $2.46 per share in 2011 |
| Gross / operating / net margin | 55.3% / 53.2% / 34.3% | 53.2% / 50.6% / 30.2% | Margins improved |
| Copper production | 1,295 million lb | 1,055 million lb | Up 22.8% |
Higher copper, silver and zinc prices and the restoration of Buenavista production drove the sales and earnings gains. Average copper prices were about 17% higher year over year; silver prices rose 74.3%. Copper sales volume increased 19.3% to 1,320.5 million pounds. By contrast, molybdenum, silver and zinc sales volumes declined 9.1%, 8.3% and 3.6%, respectively. Lower ore grades and recoveries reduced output at some Peruvian mines.
Fourth-quarter 2011 net sales were $1,669.3 million, operating income $901.9 million, net income attributable to SCC $536.9 million and EPS $0.64. Fourth-quarter 2010 comparatives were $1,499.0 million, $852.1 million, $492.2 million and $0.58, respectively.
At year-end, cash and cash equivalents were $848.1 million, short-term investments $522.0 million, and the current ratio 3.12. Total debt was $2,745.7 million, versus $2,760.4 million in 2010. The company’s reported net debt was $1,897.6 million, calculated using cash and cash equivalents, and net debt to net capitalization was 32.0% versus 12.7%. Most debt is fixed-rate; $2,551.1 million of principal was due in 2017 and thereafter. The reported debt-to-total-capitalization ratio was 40.5%.
Operating cash cost, a company-defined non-GAAP measure, rose to $0.415 per pound of copper including by-product credits, from $0.180 in 2010; excluding by-product revenue and related third-party metal-sale credits, it was $1.657 versus $1.520. The company attributed higher costs to fuel and power prices, labor, repairs and a lower by-product credit.
Material changes versus the prior comparable period
- Buenavista returned to full capacity in the second quarter of 2011 after a lengthy strike. Its recovery drove a substantial increase in Mexican open-pit sales and copper output; rehabilitation cost $212.8 million, of which $81.1 million was expensed and $131.7 million capitalized.
- Peruvian operations’ operating income fell 10.3% to $1,542.1 million, primarily reflecting lower copper sales volumes and higher costs, despite higher metal prices. Mexican open-pit operating income rose 160.9% to $1,925.1 million.
- Cash and cash equivalents declined by $1,344.6 million during 2011. Financing activities used $2,375.0 million, chiefly for dividends and share repurchases; cash used for investing activities increased to $1,083.1 million, including capital spending and short-term investment purchases.
- The company increased its share repurchase authorization to $1.0 billion and bought 9.0 million shares in 2011 for $273.7 million. Cumulative repurchases under the program were 42.5 million shares for $730.7 million.
- Peru enacted a revised operating-margin-based mining royalty and a new special mining tax in September 2011. The company recorded fourth-quarter provisions of $19.3 million and $16.4 million, respectively.
Outlook, commentary, risks and unusual items
Management expected 2012 copper production of 640,000 metric tons, including approximately 5% from third parties, and molybdenum production of about 17,200 metric tons. It budgeted $1.5 billion of 2012 capital spending, approximately $0.5 billion in Peru and $1.0 billion in Mexico, including about $0.7 billion for Buenavista. Management cited a tight copper market and anticipated improved results, while acknowledging macroeconomic uncertainty; these are forward-looking expectations, not guarantees.
- Growth projects include Buenavista expansions, with planned capacity increases phased for 2013 and 2015; Pilares, expected to start in 2013; Angangueo, expected to begin production in the second half of 2014; and Toquepala and Cuajone concentrator projects. Project schedules, costs and output depend on execution, permits, water and other conditions.
- Tia Maria, a planned 120,000-ton-per-year copper project with $434.1 million spent through year-end, was suspended by government action in April 2011 after community protests and environmental and water concerns. A new environmental impact assessment was planned, and start-up was rescheduled to 2015. The company reported no impairment at year-end.
- Labor disruption remains a risk. San Martin and Taxco had been on strike since July 2007 and had no production in 2011; operations were expected to remain suspended pending resolution. Peruvian union agreements were approaching expiry in 2012.
- A Delaware court entered a December 2011 judgment in the Lemon Bay litigation awarding $1,347 million plus $684.6 million of pre-judgment interest against AMC and other defendants, with post-judgment interest accruing. The court also awarded $304.7 million in attorneys’ fees and expenses, payable by SCC out of the award. The defendants and SCC appealed in January 2012. The filing does not provide a clear ultimate financial outcome.
- Other key exposures include volatile metal prices, fuel and electricity costs (about 37% of production cost in 2011), foreign exchange and inflation, environmental regulation, water availability, reserve estimates, slope stability, and political and community risks in Peru and Mexico. The filing identifies potential increases in environmental litigation under recently enacted or proposed Mexican measures.
- Related-party transactions and control merit attention: the company reported $100.1 million of purchases from related parties in 2011, and Grupo Mexico controls the company. The proposed AMC-Southern Copper combination was withdrawn in October 2011.
- Independent auditors issued an unqualified opinion on the consolidated financial statements and internal controls; management and the auditor reported effective internal control over financial reporting at December 31, 2011.
Important facts for investors to verify
- Whether Buenavista’s restored production and planned expansions meet stated schedules, costs and output targets.
- The status, accounting treatment and potential financial effect of the Lemon Bay judgment and appeals, including interest and the fee award.
- Progress on Tia Maria’s new environmental assessment, community engagement, approvals and revised 2015 start-up target.
- Cash generation and liquidity after dividends, repurchases and the planned $1.5 billion capital program; assess the company’s net-debt definition and short-term investment liquidity.
- Effects of Peru’s new royalty and mining tax, along with energy costs, exchange rates and changes in metal prices.
- Resolution of the San Martin and Taxco strikes, Santa Eulalia’s recovery, and labor negotiations in Peru.
- Reserve assumptions and sensitivity: reported reserves use three-year average prices, while internal long-term planning assumptions were $2.00 per pound copper and $12.00 per pound molybdenum.