Southern Copper Corporation — Q2 2009 Form 10-Q
Reporting period: Three and six months ended June 30, 2009; compared with the corresponding 2008 periods. Amounts below are in U.S. dollars. Financial statements are unaudited and were reviewed, not audited, by the independent accountant.
Business context and results
Southern Copper produces copper and by-products including molybdenum, zinc, silver, lead and gold, with operations in Peru and Mexico. The filing attributes sharply lower revenue and earnings primarily to reduced metal prices, partly offset by higher sales volumes for some products and lower costs.
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Net sales | $824.5 million | $1,461.8 million | $1,446.5 million | $2,961.0 million |
| Operating income | $303.2 million | $792.4 million | $447.3 million | $1,657.1 million |
| Operating margin | 36.8% | 54.2% | 30.9% | 56.0% |
| Net income attributable to SCC | $175.0 million | $548.5 million | $253.7 million | $1,113.5 million |
| EPS, basic and diluted | $0.21 | $0.62 | $0.30 | $1.26 |
| Operating cash flow | $107.7 million | $408.8 million | $(86.6) million | $910.0 million |
| Capital expenditures | $140.5 million | $130.9 million | $203.5 million | $180.8 million |
Liquidity, debt and capital allocation
- At June 30, cash and cash equivalents were $235.5 million and short-term investments were $33.9 million, down from $716.7 million and $62.4 million, respectively, at year-end 2008.
- Current assets were $1.203 billion and current liabilities $413.6 million; the approximate current ratio was 2.9, versus 2.1 at December 31, 2008.
- Total debt was approximately $1.285 billion ($10.0 million current and $1.275 billion long-term), broadly stable from year-end. Debt to total capitalization was 27.2%, versus 27.5% at year-end.
- First-half financing included $137.8 million of dividends, $71.6 million spent repurchasing 4.9 million shares, and $5.0 million of debt repayment. A further dividend of $0.10 per share was authorized for payment September 2, 2009.
- Management said 2009 and future cash requirements are expected to be met through cash on hand, internally generated funds and external financing if required.
Material changes and operating performance
- Sales fell 43.6% in Q2 and 51.1% in the first half. Average Q2 LME copper was $2.12/lb, down 44.6% year over year; first-half average was $1.84/lb, down 50.0%. First-half molybdenum prices fell 72.8% and zinc 41.7%.
- Q2 copper production rose 1.7% to 263.0 million pounds. Molybdenum production increased 12.6%; mined zinc and refined silver production also increased. Cananea produced no copper during the quarter.
- Operating costs declined, reflecting lower fuel and power, labor and repair-material costs, as well as lower workers’ participation and royalties. Cash cost excluding by-product credits declined to 150.3 cents/lb in Q2 from 184.6 cents/lb; including by-product credits, cash cost was 50.9 cents/lb versus 5.5 cents/lb. These are company-defined non-GAAP measures.
- First-half operating cash flow was negative despite positive net income. The company cited $514.6 million of working-capital use, particularly increases in receivables and reductions in payables and accrued liabilities. Q2 operating cash flow remained positive at $107.7 million.
Outlook, projects, risks and unusual items
- Management reported improving copper and by-product prices during 2009, supported in part by restored Chinese demand, but cautioned that near-term metal prices remain volatile. No formal full-year earnings or production guidance is provided.
- Expansion work continued despite suspension of many new or expansion investments in the prevailing business environment. Tia Maria, with an approved $934 million budget, was expected to produce about 260 million pounds of copper annually; operations were scheduled to begin in 2011. The Toquepala concentrator expansion was expected to add 100,000 tons of annual copper output by the second half of 2012.
- Cananea, Taxco and San Martin remained closed because of strikes begun in 2007. The Cananea labor-termination ruling was under challenge, with a decision expected in August 2009. Management reported no Cananea asset impairment at June 30, but said materially lower future copper or molybdenum price estimates could change that conclusion.
- A Texas court judgment dated April 15, 2009 awarded Asarco shares representing approximately 30.6% of SCC’s outstanding shares, plus dividends and interest. Grupo Mexico’s subsidiary AMC appealed; enforcement was stayed pending appeal. The filing warns that parent-company obligations could lead to requests for increased SCC dividends or other funding.
- Grupo Mexico/AMC became the beneficial owner of 80% of SCC in March 2009. SCC expected to join AMC’s U.S. federal consolidated tax return and was negotiating a tax-sharing agreement. The filing identifies potential joint and several group tax liabilities and possible limits on tax-credit and loss carryforwards.
- Peruvian former employees’ labor-share lawsuits remain unresolved; SCC made no provision, citing its defenses, and said the financial effect could not be determined. The Peruvian mine-closure plan had received government comments, including on costs; the $18.4 million retirement obligation estimate was expressly subject to caution pending final approval.
- The company had 25.4 million pounds of provisionally priced copper sales at an average forward price of $2.25/lb and 13.9 million pounds of molybdenum at $10.60/lb, subject to later pricing. Management expected final pricing not to have a material effect.
- Market risks include metal prices, foreign exchange, interest rates, labor, litigation and environmental matters. A 1% interest-rate change was estimated to affect annual net income and cash flows by $0.5 million. Mexican and Peruvian environmental regulation and operating conditions remain relevant risks.
Most important facts for investors to verify
- Subsequent copper and by-product prices, realized sales pricing, production and cash costs—especially the degree to which the 2009 earnings decline reflects prices versus operational changes.
- Cash generation and working-capital movements, including receivable collections and the sustainability of liquidity amid ongoing capital spending and dividends.
- Developments in the Cananea, Taxco and San Martin stoppages, including restart timing, legal outcomes and any resulting impairment or additional costs.
- Outcome of the Asarco appeal and potential effects on SCC ownership, dividends and parent-company funding demands.
- Final AMC tax-sharing arrangements and SCC’s potential exposure to consolidated-group taxes; status of labor-share litigation and Peruvian mine-closure cost approval.
- Progress, funding needs, approvals and schedules for Tia Maria and the Toquepala expansion.