Southern Copper Corporation — Q1 2016 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2016. Southern Copper is an integrated copper and other-minerals producer operating primarily in Peru and Mexico; Grupo Mexico indirectly owned 88.8% at quarter-end. Results are unaudited interim figures and are not necessarily indicative of full-year performance.
Financial and operating highlights
| Metric | Q1 2016 | Q1 2015 / prior date |
|---|---|---|
| Net sales | $1,245.1 million | $1,274.8 million |
| Operating income | $346.2 million; 27.8% margin | $436.9 million; 34.3% margin |
| Net income attributable to SCC | $185.1 million; $0.24 per share | $282.4 million; $0.35 per share |
| Operating cash flow | $64.1 million | $224.4 million |
| Capital investment | $223.3 million | $248.7 million |
| Cash and cash equivalents | $376.0 million | $274.5 million at Dec. 31, 2015 |
| Short-term investments | $282.6 million | $603.5 million at Dec. 31, 2015 |
| Long-term debt | $5,952.1 million | $5,951.5 million at Dec. 31, 2015 |
| Current assets / current liabilities | $2,459.0 million / $982.7 million | $2,484.2 million / $920.2 million at Dec. 31, 2015 |
Sales declined 2.3%, while SCC-attributable net income fell 34.5%. Average copper prices were down about 20% year over year, with lower prices for molybdenum, zinc and silver as well. Higher copper sales volumes partly offset price pressure: copper sold increased 26.2% to 469.3 million pounds. Copper production rose 24.8% to 488.7 million pounds, led by Buenavista; molybdenum production decreased 4.9%, while silver and zinc production increased.
Operating costs and expenses rose 7.3% to $898.9 million, mainly on greater Mexican production and higher depreciation. Interest expense increased and capitalized interest decreased as Buenavista projects entered operations. The effective tax rate was 33.8%, versus 31.5%. Cash from operations declined substantially, principally because operating assets and liabilities absorbed $238.9 million, including higher receivables, inventories and other operating assets. Investing cash flow was $98.3 million, reflecting $320.8 million of net proceeds from short-term investments offsetting capital spending. Financing used $76.9 million, including $23.2 million of dividends and $53.7 million of share repurchases.
Cash plus short-term investments totaled $658.6 million at quarter-end, down from $878.0 million at year-end. The filing reports long-term debt but does not provide a clear total-debt figure including current maturities in the summarized balance-sheet data. The current ratio was approximately 2.5. Dividends paid were $0.03 per share, compared with $0.10 a year earlier.
Material changes and outlook
- Management forecast 2016 copper production of 903,300 tons, up 21.6% from 2015; molybdenum production of 21,800 tons, down 6.6%; silver of 16.0 million ounces, up 20.3%; and zinc of 86,900 tons, up 40.5%.
- Management described a more positive outlook for copper, citing improving demand sentiment and announced supply cuts, while noting economic uncertainty and volatile commodity markets. It viewed molybdenum conditions as weak and expected a more favorable long-term zinc price environment. These are management expectations, not assured outcomes.
- Buenavista’s new concentrator was reported at 93% capacity and expected to reach full capacity in Q2 2016. The Toquepala expansion is expected to add annual capacity of 100,000 tons of copper and 3,100 tons of molybdenum, with completion expected in 2018.
- Tia Maria, a planned $1.4 billion project, had environmental impact assessment approval but still awaited construction permits amid community opposition. The company had invested $361.9 million through March 31, 2016. The Toquepala expansion had a $1.2 billion budget, with $405.7 million invested. Total commitments for capital projects were approximately $2.113 billion.
- The Board authorized a subsequent $0.05-per-share dividend on April 21, payable May 24, 2016. SCC also began a restructuring program; 180 employees accepted severance packages, and management said the final cost was not yet known but expected the provision to be immaterial.
Risks, contingencies and unusual items
- Commodity prices are the principal earnings sensitivity: management estimated that, for the remaining nine months of 2016, a $0.10-per-pound copper price change would change SCC-attributable net income by about $104.3 million, assuming stated production, sales and tax assumptions and no hedging effect.
- Following the 2014 Buenavista leaching-solution spill into the Bacanuchi and Sonora rivers, the company reported estimated total damages of $136.4 million. It reported $41.1 million paid with company funds and approximately $74.9 million deposited in a remediation trust; the company had committed up to approximately $150 million to the trust. Litigation and remediation proceedings continued. The company considered the resulting legal proceedings not likely to have a material effect, but outcomes remain uncertain.
- Peruvian environmental compliance costs for sulfur-dioxide air-quality and soil standards could not be reasonably estimated; management stated that meaningful cost ranges were unavailable pending further government direction and studies.
- Long-running labor-share litigation in Peru involves claims by former employees; the company made no provision because it asserts defenses and cannot reasonably estimate the contingency. Legal disputes concerning Tia Maria and the Quebrada Honda tailings facility also remained pending.
- Strikes at the San Martin and Taxco mines in Mexico remained unresolved, and operations were expected to stay suspended. The company reported a non-material impairment of assets at those mines.
- Management identified risks from metal-price volatility, foreign exchange, permits, labor relations, litigation, environmental obligations, operating disruptions, ore grades and financing. A new Delaware derivative action concerning related-party transactions involving MGE was filed in February 2016; the company denied the allegations.
Most important facts for investors to verify
- Whether copper prices, Buenavista ramp-up and production guidance support the projected 2016 output and margins.
- Whether operating cash flow recovers as working-capital investment moderates, and how planned capital spending will be funded.
- Debt maturities, interest costs and covenant terms; reported long-term debt was approximately $5.95 billion.
- Progress on Tia Maria permits and community engagement, and timing and execution of the Toquepala expansion.
- Developments and potential costs from the Buenavista spill, Peruvian labor-share claims, and other environmental and legal contingencies.
The independent accountant performed a review of the interim financial statements, not a full audit, and reported no material modifications that should be made for GAAP conformity. Management stated that disclosure controls were effective and reported no material first-quarter change in internal control over financial reporting.