Southern Copper Corporation (NYSE: SCCO) — Q2 2022 Form 10-Q
Business context and period. Southern Copper is an integrated copper and other-metals producer operating principally in Peru and Mexico. This unaudited quarterly report covers the three and six months ended June 30, 2022; comparisons are with the corresponding 2021 periods. Grupo Mexico indirectly owned 88.9% of SCC at quarter-end.
Financial and operating performance
Amounts are in U.S. dollars; financial figures are in millions unless stated otherwise.
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $2,306.9 | $2,897.0 | $5,070.7 | $5,429.5 |
| Operating income | $808.5 | $1,675.2 | $2,278.6 | $3,026.8 |
| Net income attributable to SCC | $432.3 | $932.7 | $1,217.1 | $1,696.6 |
| Diluted earnings per share | $0.56 | $1.21 | $1.57 | $2.19 |
| Operating cash flow | $309.9 | $1,061.5 | $1,130.6 | $1,844.2 |
| Capital expenditures | $224.6 | $219.8 | $429.7 | $452.4 |
- Margins: Operating margin was approximately 35.0% in Q2 2022 versus 57.8% a year earlier; attributable net margin was approximately 18.7% versus 32.2%. For the first half, operating margin was approximately 44.9% versus 55.7%, and attributable net margin approximately 24.0% versus 31.2%.
- Liquidity: At June 30, cash and cash equivalents were $2,113.1 and short-term investments $242.6, totaling $2,355.7, down from $3,488.9 at year-end 2021. Current assets were $4,968.8 and current liabilities $1,508.4; the resulting current ratio was approximately 3.3.
- Debt: Current and non-current debt totaled approximately $6,549.4. Lease liabilities were $883.7, reported separately. Cash and short-term investments were below reported debt.
- Dividends: Cash dividends paid were $966.4 in Q2 and $1,739.5 in the first half. A further $0.75-per-share dividend was authorized July 21, payable August 25, 2022.
Material changes and management commentary
- Q2 sales fell 20.4%, operating income 51.7%, and SCC-attributable net income 53.7% year over year. First-half sales declined 6.6% and attributable net income declined 28.3%.
- Q2 copper sales volume declined 16.4%; mined copper production declined 12.1%. First-half copper sales volume declined 14.9% and production declined 11.1%. Lower grades and the Cuajone stoppage weighed on output.
- Q2 LME copper averaged $4.32/lb, down 1.8% year over year; first-half average was $4.43/lb, up 7.3%. Higher molybdenum and zinc prices partly offset weaker copper and silver prices and lower sales volumes. The filing reports a negative Q2 provisional-sales adjustment of $112.6 million, compared with a positive $60.9 million adjustment in Q2 2021.
- Operating costs and expenses rose 22.6% in Q2 and 16.2% for the first half. Management cited higher fuel, power and materials costs, worker participation expense, and purchased metals, as well as reduced production volumes. Q2 operating cash cost per pound of copper, net of by-product revenue, rose to $1.10 from $0.59; the first-half measure rose to $0.82 from $0.66. This is a company-defined non-GAAP measure.
- First-half effective tax rate was 42.6%, compared with 40.6%. The company said uncertain Peruvian tax positions contributed to the increase; a refund-related tax provision increased expense by approximately $33.1 million.
Outlook, projects and risks
- Production outlook: SCC expected 2022 copper production of 898,200 tonnes, down 6.3% from 2021, and 2023 production of 971,200 tonnes as Peruvian output recovers and Pilares and Buenavista Zinc contribute. The company also forecast 25,700 tonnes of molybdenum, 18.9 million ounces of silver and 66,900 tonnes of zinc for 2022.
- Commodity outlook: Management cited recession concerns, central-bank rate increases and weaker Chinese construction activity as near-term copper-price pressures, while expecting long-term demand to benefit from the energy transition. It characterized the low-price cycle as potentially short-lived. These are forward-looking views, not assured outcomes.
- Cuajone disruption: Community actions blocked the railway and water facilities from February until their return in April. The company estimated lost production of 22,208 tonnes of copper and 485 tonnes of molybdenum, a $228 million sales reduction, and $14.0 million of unabsorbed fixed costs. Operations returned to full capacity April 25. Dialogue with the community continued; recurrence could disrupt operations.
- Projects: Pilares was expected to start production in Q4 2022; Buenavista Zinc was targeted for the second half of 2023. Tia Maria remained subject to social and legal opposition despite its construction permit; $333.5 million had been invested against an approximately $1.4 billion budget. SCC expected in-depth Michiquillay exploration to begin in Q3 2022. Project timing, costs and expected output remain uncertain.
- Other risks and contingencies: The filing identifies volatile metal prices, inflation and energy costs, foreign-exchange exposure, shipping and supply-chain constraints, community action, labor disputes, environmental regulation and litigation. Tia Maria and other legal contingency amounts were not reasonably estimable in certain cases. A partial temporary shutdown affecting sulfuric-acid storage and transport at Guaymas remained pending, although management expected no current operational impact. The asset retirement obligation increased by $43.3 million following an estimate review.
- Cash flow and capital allocation: First-half operating cash flow fell 38.7%; the filing attributes material working-capital effects to lower accrued tax and other liabilities, partly offset by collections. Dividends paid exceeded operating cash flow in the first half. Management said capital spending would be reviewed and adjusted to economic and market conditions.
Important facts for investors to verify
- Whether copper production and sales recover as forecast, including the performance of Cuajone and the planned contributions from Pilares and Buenavista Zinc.
- Whether lower copper prices, reduced by-product revenue and cost inflation continue to pressure margins and cash generation.
- Progress in community discussions and the status of Cuajone-related claims, Tia Maria proceedings and the Guaymas matter.
- The amount and timing of future dividends, capital spending and project funding relative to cash balances and debt.
- The final pricing of provisionally priced metal sales and the resolution or evolution of uncertain tax positions and closure obligations.
The independent accountant performed a review of interim financial information, not a full audit, and reported that it was not aware of material modifications needed for GAAP conformity. Management stated that disclosure controls were effective as of June 30, 2022.