Southern Copper Corporation — Q3 2023 Form 10-Q
Business and period: Southern Copper is an integrated copper and by-product producer operating primarily in Peru and Mexico. This unaudited quarterly report covers the three and nine months ended September 30, 2023; comparisons are with the same 2022 periods unless indicated otherwise. Grupo Mexico indirectly owned 88.9% of the company.
Financial and operating performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $2,505.6 million | $2,156.9 million | $7,600.2 million | $7,227.6 million |
| Operating income | $1,069.2 million | $787.2 million | $3,323.6 million | $3,065.7 million |
| Net income attributable to SCC | $619.5 million | $519.0 million | $1,980.2 million | $1,736.1 million |
| Diluted earnings per share | $0.80 | $0.67 | $2.56 | $2.25 |
| Operating margin | 42.7% | 36.5% | 43.7% | 42.4% |
Revenue growth reflected higher copper, molybdenum and silver prices, partly offset by lower zinc prices and weaker sales volumes for some metals. Q3 operating income rose 35.8% and attributable net income rose 19.4%; for the nine months, they increased 8.4% and 14.1%, respectively. Nine-month sales were up 5.2% (management’s summary table cites 5.2%; a separate overview passage rounds this to 5.3%).
Costs and production: Operating costs and expenses increased 4.9% in Q3 and 2.8% year to date. Copper mine production was down 1.9% in Q3 but up 3.6% for the nine months; copper sales volume was down 4.5% in Q3 and up 5.3% year to date. Molybdenum production rose 12.6% in Q3; zinc production rose 9.4%. Management’s non-GAAP copper cash cost was $0.98 per pound net of by-product revenues in Q3 (down 4.9%) and $0.95 year to date (up 5.6%). Before by-product revenues, the costs were $2.24 and $2.17 per pound, respectively.
Cash flow, liquidity and debt: Nine-month operating cash flow was $3,032.1 million versus $1,720.6 million. Capital expenditures were $753.2 million versus $657.6 million; operating cash flow less capital expenditures was $2,278.9 million, an arithmetic measure rather than company-defined free cash flow. Cash and cash equivalents were $1,967.1 million at September 30, 2023, and short-term investments were $247.1 million. Current assets were $4,748.0 million and current liabilities $1,284.1 million. Long-term debt was $6,253.8 million, broadly unchanged from $6,251.2 million at year-end 2022. Cash and short-term investments together were below long-term debt by approximately $4,039.6 million.
Cash dividends paid to common shareholders were $2,319.3 million in the first nine months of both years. Q3 2023 dividends paid were $773.1 million, compared with $579.8 million in Q3 2022. The board subsequently authorized a $1.00-per-share dividend payable November 22, 2023.
Outlook, commentary and key risks
- 2023 production outlook: Management expects 917,700 tonnes of copper, 25,900 tonnes of molybdenum, 19.3 million ounces of silver and 64,200 tonnes of zinc. It expects zinc production above 124,900 tonnes annually from 2024 onward. These are forward-looking estimates, not guarantees.
- Markets: Management noted expectations of a copper market surplus of about 170,000 tonnes in 2023, rising inventories and a stronger U.S. dollar as near-term pressures, while describing long-term copper demand as supported by the energy transition. It expects molybdenum prices to have short-term support from a market deficit and demand in aerospace and defense.
- Projects and investment: Capital investment was $753.2 million year to date; approximately $423.2 million was committed to capital projects at quarter-end. The Buenavista Zinc concentrator was 99% complete, but commissioning/ramp-up was delayed from Q4 2023 to Q1 2024 for technical adjustments. Pilares was operating and supplying ore. Tia Maria remains subject to legal challenges and is described as on hold; project timing and development remain uncertain.
- Exposure and contingencies: Results are sensitive to volatile metal prices, local-currency exchange rates, inflation, ore grades, operating conditions, labor relations, permits and political or regulatory developments. The company identifies lawsuits concerning Tia Maria and the Pasto Grande tailings area in Peru, and numerous proceedings relating to the 2014 Buenavista spill in Mexico. Management says the claims are without merit; some potential amounts cannot be reasonably estimated. A new criminal complaint concerning the spill was announced October 12, 2023, after quarter-end.
- Regulatory and environmental matters: A Peruvian law may require additional mine-closure guarantees, but implementing regulations had not been published and the financial impact could not yet be fully estimated. Mexico’s Senate approved a mining-industry bill in April 2023; the company says possible future legal changes could affect its business and growth plans, though it cannot assure there will be no impact. A partial temporary shutdown affecting sulfuric acid storage and transport at the Guaymas terminal remained unresolved; management did not expect an operational impact.
- Other items: The company reported no material cybersecurity incidents in Q3. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting. The independent accountant’s interim review found no material modifications needed; it was a review, not an audit.
Investor verification priorities
- Check realized metal prices, sales volumes, production and the drivers of higher operating costs, particularly maintenance, labor and treatment/refining charges.
- Monitor whether the Buenavista Zinc project completes commissioning and achieves its revised Q1 2024 ramp-up schedule.
- Track cash generation against capital spending and dividends, and review debt maturities, interest costs and liquidity in the full filing.
- Follow developments in the Tia Maria and Pasto Grande cases, the Buenavista spill proceedings, and the pending Peruvian closure-guarantee regulations.
- Assess the assumptions behind 2023 production guidance, project budgets and schedules, and potential effects of Mexican mining-law changes and metal-price volatility.