Southern Copper Corporation — Q3 2021 Form 10-Q
Business context and reporting period. Southern Copper is an integrated copper and by-product producer operating mines, smelters and refineries in Peru and Mexico. This unaudited filing covers the three and nine months ended September 30, 2021; comparisons are with the same 2020 periods unless stated otherwise. Grupo Mexico indirectly owned 88.9% of the company.
Financial and operating performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $2,680.9 million | $2,129.1 million | $8,110.4 million | $5,634.2 million |
| Operating income | $1,507.8 million | $943.9 million | $4,534.6 million | $2,054.3 million |
| Net income attributable to SCC | $867.6 million | $506.0 million | $2,564.2 million | $980.3 million |
| Diluted earnings per share | $1.12 | $0.65 | $3.32 | $1.27 |
| Net cash from operating activities | $1,220.6 million | $793.5 million | $3,064.7 million | $1,688.0 million |
| Capital expenditures | $243.1 million | $134.5 million | $695.5 million | $348.8 million |
- Q3 sales rose 25.9%, operating income 59.7% and SCC-attributable net income 71.5%. For the nine months, sales increased 43.9%, operating income 120.7% and attributable net income 161.6%.
- Growth was primarily price-driven. Q3 average copper price was $4.25/lb, up 43.6%; molybdenum was $18.43/lb, up 143.5%. Q3 copper sales volume fell 14.3%, while copper production declined 0.6% to 540.5 million pounds.
- Reported net income margin for the nine months was 31.6%, compared with 19.7% for 2020. Operating margin, calculated as operating income divided by sales, was approximately 56.2% in Q3 versus 44.3%, and 55.9% for the nine months versus 36.5%.
- Operating cash cost per pound of copper, a company-defined non-GAAP measure, was $1.62 before by-product credits and $0.58 net of by-product revenues in Q3. Nine-month net cash cost was $0.64/lb versus $0.69/lb.
Balance sheet, liquidity and capital returns
- At September 30, cash and cash equivalents were $2,583.7 million and short-term investments were $626.8 million. Current assets were $5,890.8 million against current liabilities of $1,789.1 million; the reported current ratio was 3.29.
- Long-term debt was $6,546.7 million, broadly unchanged from $6,544.2 million at year-end 2020. The company reported a total debt ratio of 0.36. Cash plus short-term investments were approximately $3.21 billion; debt maturities were described as having no major maturity scheduled until November 2022.
- Operating cash flow funded $695.5 million of capital investment and $1,700.8 million of dividends during the first nine months. Cash dividends were $2.20 per share for the nine-month period, compared with $1.00 a year earlier.
- On October 21, 2021, the board authorized a further $1.00-per-share dividend, payable November 23 to shareholders of record November 10.
Material changes and management commentary
- Higher metal prices more than offset lower copper sales volumes. Nine-month copper sales volume declined 10.9%; mined copper production declined 2.8% to 1,588.8 million pounds. Silver production fell 10.5% and zinc production 3.3%; molybdenum production declined 1.8%.
- Operating costs and expenses were nearly flat year over year: $1,173.1 million in Q3 and $3,575.8 million for the nine months. Management cited higher fuel, power, labor and contractor costs, partly offset by lower purchased-metal costs and other factors.
- Production facilities in Peru and Mexico were operating at approximately 96% of capacity. Management cited pandemic-related shipping congestion and delays in receiving imported materials, shipping products and collecting receivables, but said the effects had not materially impacted financial position.
- Management expects copper production of 958,000 tons in 2021 and 922,000 tons in 2022, with a recovery to 1,000,000 tons in 2023. Lower grades and recovery at Peruvian operations are expected to weigh on 2021–2022 output. The filing gives no earnings or revenue guidance.
- Planned projects include Buenavista Zinc, expected to begin operations in 2023; Pilares, expected to begin production in Q1 2022; and El Pilar, expected to start production in 2023. Tia Maria remains on hold amid community opposition and litigation; $340.7 million had been invested against its approximately $1.4 billion budget. The company said it had no pending major capital expenditure commitments after completing the first stage of major programs, while separately disclosing $369.4 million committed to capital investment projects.
Risks, contingencies and unusual items
- Commodity and currency exposure: Results depend materially on volatile copper and by-product prices. The filing also describes exposure to Peruvian sol and Mexican peso movements and provisionally priced metal sales. Natural gas cash-flow hedges cover November 2021 through March 2022.
- Supply chain: Port congestion, container shortages and limited shipping capacity could disrupt supplies, projects, sales and collections; management said a prolonged disruption could adversely affect operations.
- COVID-19: The full financial and operating impact remained uncertain. Argentina exploration activities remained limited while community programs were developed.
- Legal and environmental matters: Tia Maria-related lawsuits remain pending and management cannot reasonably estimate the potential contingency. The Guaymas sulfuric-acid terminal partial-shutdown matter remained pending after the company challenged dismissal of its lawsuit; the company did not expect an operational impact. Claims related to the 2014 Buenavista spill also remain pending; the company said it did not expect them, individually or collectively, to materially affect its financial position or results.
- Related-party governance: The company conducts recurring purchases, sales and services with Grupo Mexico affiliates, including power, transport and construction. A shareholder derivative case involving affiliate transactions reached a settlement agreement in principle, subject to court approval.
- Cybersecurity: A March 2021 ransomware attack encrypted 479 servers and 303 personal devices. The company said its ERP was unaffected, affected servers were restored, and its forensic investigation had found no concrete evidence of data theft. It recorded $0.3 million of related costs through September 30 and may incur more.
- Tax and closure obligations: The nine-month effective tax rate was 40.0%, versus 44.4% in 2020. Asset-retirement obligations were $559.6 million, up from $545.0 million at year-end 2020. Management reported no impairment indicators at September 30.
Important facts for investors to verify
- Whether higher metal prices persist and whether copper sales volumes and mine grades recover as expected.
- Progress against the 2021–2023 production outlook and project schedules, budgets and required approvals, particularly at Pilares, Buenavista Zinc, Tia Maria and Michiquillay.
- Developments in Tia Maria, Buenavista spill, Guaymas terminal and derivative-litigation matters, including any change in the company’s contingency assessments.
- Whether shipping constraints, pandemic effects, and rising fuel, power and labor costs materially affect production, working capital or project execution.
- Dividend sustainability relative to cash generation, capital spending and the company’s $6.55 billion of long-term debt.
The interim financial statements were reviewed by the independent registered public accounting firm, which reported that it was not aware of material modifications needed for GAAP conformity; the review was not an audit. Management concluded disclosure controls were effective as of September 30, 2021.