Business context and reporting period
Southern Copper Corporation (SCC), a copper producer with principal operations in Peru and Mexico, filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2013. Results are compared with the same 2012 periods. The independent accountant conducted an interim review, not an audit.
Financial and operating performance
Amounts are in millions of U.S. dollars except per-share data, margins, production and where noted.
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $1,410.2 | $1,659.9 | $3,033.2 | $3,465.8 |
| Operating income | $565.3 | $875.6 | $1,335.4 | $1,848.5 |
| Operating margin | 40.1% | 52.7% | 44.0% | 53.3% |
| Net income attributable to SCC | $372.7 | $563.5 | $868.1 | $1,185.0 |
| EPS, basic and diluted | $0.44 | $0.66 | $1.03 | $1.39 |
| Operating cash flow | $305.9 | $377.1 | $900.4 | $1,097.5 |
| Capital expenditures | $385.5 | $230.3 | $702.3 | $407.7 |
- Q2 net margin attributable to SCC was 26.4%, versus 33.9% a year earlier; six-month net margin was 28.6%, versus 34.2%.
- At June 30, cash and cash equivalents were $1,939.7 and short-term investments $392.9, compared with $2,459.5 and $134.3, respectively, at December 31, 2012. Current assets were $3,875 and current liabilities $664, a current ratio of approximately 5.8.
- Total debt was approximately $4,209, nearly unchanged from $4,214 at year-end. Long-term debt fair value was reported at $4,109.5. Interest expense for the first half rose to $131.8 from $94.6, principally following the November 2012 issuance of $1.5 billion of secured notes.
- Six-month operating cash flow less capital expenditures was approximately $198.2, versus $689.8 in 2012. Cash declined $519.8 during the period; investing cash use was $950.1 and financing cash use was $441.7.
- Q2 dividends paid were $0.20 per share; the board subsequently declared $0.12 per share, payable August 20, 2013. SCC repurchased shares for $64.5 in the first half.
Material changes versus the prior comparable period
- Q2 sales fell 15.0% and six-month sales fell 12.5%. SCC attributed the decline mainly to lower metal prices and lower copper sales volumes.
- Six-month net income attributable to SCC decreased 26.7%; Q2 decreased 33.8%. Average LME copper price fell 9.2% in Q2 and 6.8% in the first half. First-half molybdenum and silver prices declined 20.4% and 14.5%, respectively.
- Six-month copper sales volume declined 41 million pounds to 675 million pounds. Mine copper production fell 5.3%; Q2 production fell 8.2%, including lower output at Toquepala and Buenavista. Buenavista’s Q2 output was affected by a temporary flood disruption.
- Operating cash cost per pound of copper produced, a non-GAAP measure, rose 23.8% to $2.05 in Q2 and 15.9% to $1.99 for the first half. Management cited cost inflation, labor increases and lower production. By-product revenue per pound also declined.
- Six-month operating costs and expenses increased $80.6 despite lower sales, reflecting higher cost of sales and depreciation. Mexican open-pit operating income fell 21.6% for the first half; IMMSA operating income fell 55.1%.
Outlook, management commentary, risks and unusual items
- SCC reduced 2013 copper production guidance from 650,000 to 640,000 tonnes (about 620,000 tonnes from its mines and 20,000 tonnes from third-party concentrates) and molybdenum guidance from 19,800 to 18,800 tonnes. It maintained guidance of 16.3 million ounces of silver and 99,100 tonnes of zinc.
- Management aims to increase annual copper production capacity to 1.2 million tonnes by 2017. The $3.1 billion Buenavista investment program targets capacity growth from 180,000 to 488,000 tonnes by 2015. SXEW III was 62% complete, with a target start in Q2 2014; Quebalix III reached full capacity in Q2 2013.
- First-half capital spending was $702.3, and management expects to fund projects from cash on hand, internally generated funds and external financing if required. Spending plans remain subject to review and market conditions.
- Tia Maria, a project exceeding $1 billion, remains suspended pending a new environmental impact study and government approvals. Start-up was rescheduled to 2016; the company reported $500.1 spent through June 30 and said it expected any impairment, if any, would not be material.
- Peru’s stricter sulfur-dioxide air-quality standard is scheduled to take effect January 1, 2014. SCC says available technology cannot meet it and believes the smelter can continue operating, but this interpretation may be challenged. A preliminary five-year compliance-enhancement program is estimated to cost $350 million.
- Other significant exposures include Peruvian former-employee labor-share lawsuits, for which SCC recorded no provision because it believes it has defenses and cannot reasonably estimate the contingency; ongoing San Martin and Taxco labor disputes; and a lawsuit concerning a tailings dam. SCC says it is defending these matters.
- Metal prices, mine performance, costs and currencies are key risks. Management also cited macroeconomic uncertainty, possible supply and labor disruptions, permitting, environmental obligations, weather, ore grades, equipment and financing risks. Management stated disclosure controls were effective and there were no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether copper prices, production and unit costs stabilize, especially after the Buenavista disruption and lower Toquepala output.
- Progress, remaining funding needs and delivery dates for Buenavista and other capital projects, and whether the reduced 2013 production guidance is achieved.
- Regulatory developments and potential investment or operating consequences for the Ilo smelter’s air-quality requirements.
- Required approvals and community response for Tia Maria, along with the recoverability and reuse of project assets.
- Developments in labor-share, mine-labor and tailings-dam litigation, and any change in the company’s ability to estimate or accrue potential losses.
- Liquidity and capital allocation as cash declines amid substantial capital spending, dividends and share repurchases; also verify debt maturities, covenants and interest costs.