Southern Copper Corporation — Q2 2018 Form 10-Q
Business and period. Southern Copper is an integrated copper and other-minerals producer operating in Peru and Mexico. This unaudited report covers the three and six months ended June 30, 2018; comparisons are with the same 2017 periods. Grupo Mexico indirectly owned 88.9% of the company.
Financial and operating performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Net sales | $1,837.2m | $1,529.8m | $3,678.4m | $3,113.8m |
| Operating income | $787.6m | $525.9m | $1,561.0m | $1,096.4m |
| Net income attributable to SCC | $409.6m | $299.7m | $880.3m | $614.1m |
| Diluted earnings per share | $0.53 | $0.39 | $1.14 | $0.79 |
| Operating margin | 42.9% | 34.4% | 42.4% | 35.2% |
| Net cash from operating activities | $406.2m | $353.8m | $1,056.1m | $843.9m |
| Capital investments | $253.9m | $252.1m | $549.6m | $497.7m |
| Dividends paid | $231.9m | $92.8m | $463.8m | $154.6m |
- Drivers and margins: Revenue rose 20.1% in Q2 and 18.1% in the first half, mainly from higher metal prices. Average LME copper prices increased 21.4% in Q2 and 20.3% year over year in the first half. Operating costs rose 4.6% and 5.0%, respectively, slower than sales growth. The six-month effective tax rate increased to 38.3% from 35.7%, reflecting the loss of foreign tax-credit benefits and the new U.S. GILTI tax.
- Production and sales: Q2 mined copper production increased 2.0% to 484.9 million pounds; first-half production declined 1.1% to 936.5 million pounds. First-half copper sales volume fell 3.2% to 949.5 million pounds. Management attributed the production decline principally to lower Cuajone recoveries and lower Buenavista SX-EW output. Silver production rose 10.0% in the first half; molybdenum and zinc production declined 1.0% and 1.9%.
- Cash and liquidity: Cash and equivalents were $1,032.5m and short-term investments $50.7m at June 30. Current assets were $3,169.5m versus current liabilities of $1,006.2m. Operating cash flow less capital investments was approximately $506.5m for the first half. Cash increased $27.7m from year-end to $1,032.5m, despite higher capital spending and dividends.
- Debt: Long-term debt was $5,958.5m, essentially unchanged from $5,957.1m at year-end 2017. Cash and short-term investments totaled $1,083.2m; the filing does not present a net-debt measure.
- Dividends: The company paid $0.30 per share in May. On July 19, the board declared a subsequent $0.40-per-share dividend, payable August 21 to shareholders of record August 8.
Outlook, projects, and notable matters
- Management forecast 2018 production of 901,000 tons of copper, 17.5 million ounces of silver, 84,600 tons of zinc, and 21,900 tons of molybdenum. It expected the Toquepala expansion to begin production in Q3 2018, increasing annual copper capacity by 100,000 tons. These are forward-looking estimates, not assured results.
- Management described copper prices as having fallen in July amid trade-protectionism concerns, but expected a recovery, citing anticipated demand growth of 2.5%–3.0% and supply growth of about 2.0% for 2018. It cautioned that commodity prices, permits, operating conditions, labor, and political and environmental risks could affect results.
- The Tia Maria project remained on hold pending a construction permit, despite management’s expectation that the permit would be issued in 2018. The approximately $1.4bn project had $356.8m invested. Four related lawsuits remained pending; management said the potential contingency could not be reasonably estimated.
- In June, SCC signed a $400m contract to acquire the Michiquillay project. It paid $12.5m and accrued another $12.5m; the remaining $375m is due if the company elects to develop it. Management estimates development investment of about $2.5bn and a possible production start in 2025.
- Buenavista-related environmental and civil proceedings continued. The 2014 spill criminal complaint was dismissed in Q2 2018; other collective, civil, and constitutional cases remained pending. The company considered them without merit and did not expect the spill proceedings to materially affect its financial position or results.
- Peruvian soil-contamination studies could lead to remediation obligations, but the company could not estimate a meaningful loss range; it expected to be able to assess costs after studies substantially progress, anticipated in Q1 2020. Revised closure plans for Cuajone and Ilo were pending approval. Tia Maria and other project, labor, and environmental contingencies remain relevant.
- Operating cash cost net of by-product revenues, a non-GAAP measure, was $0.81 per pound in Q2 and $0.80 in the first half, down from $0.98 and $0.93, respectively. The improvement was primarily due to higher by-product prices.
Investor facts to verify
- Whether copper and by-product prices, production volumes, and sales pricing continue to support earnings, particularly given lower first-half copper sales and July’s copper-price decline.
- Progress and actual commissioning of the Toquepala expansion, and whether the stated 2018 production targets are achieved.
- Permitting, community, litigation, and impairment developments for Tia Maria, plus the conditions and funding required for Michiquillay development.
- Capital-spending commitments (approximately $1,453.2m for projects at June 30), dividend cash requirements, and the effect on liquidity and debt.
- Developments in Buenavista spill claims, Peruvian soil remediation estimates, mine-closure plans, and labor negotiations or suspended-mine disputes.
- Tax-rate effects, including GILTI and mining royalties, and exposure to currency movements and provisionally priced metal sales.