Southern Copper Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; balance-sheet comparisons are with December 31, 2014. Southern Copper is an integrated copper and by-product producer operating mainly in Peru and Mexico. Grupo Mexico indirectly owned 86.0% at quarter-end. Amounts below are U.S. dollars unless noted.
Financial and operating results
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Net sales | $1.275 billion | $1.354 billion; down 5.9% |
| Operating income | $436.9 million; 34.3% margin | $562.9 million; 41.6% margin |
| Net income attributable to SCC | $282.4 million; $0.35 per diluted share | $323.4 million; $0.39 per share |
| Operating cash flow | $221.5 million | $348.2 million |
| Capital investment | $245.8 million | $336.9 million |
| Dividends paid | $80.5 million; $0.10 per share | $100.0 million; $0.12 per share |
Gross debt at March 31 was approximately $4.26 billion, comprising $4.006 billion long-term debt, $200 million current portion of long-term debt, and $50 million short-term debt. Cash and cash equivalents were $192.1 million, restricted cash $9.1 million, and short-term investments $83.8 million. Current assets were $2.002 billion versus current liabilities of $1.048 billion. The filing reports a $200 million note due in July 2015.
Net income was $283.7 million before non-controlling interests. Income taxes were $129.2 million, with a 31.5% effective rate versus 39.1% a year earlier. Operating cash flow was pressured by a $143.3 million net use from changes in operating assets and liabilities, especially reduced payables and accrued liabilities. Financing cash outflow included $370.1 million of share repurchases; the company repurchased 13.1 million shares during the quarter.
Material changes versus Q1 2014
- Sales fell $79.6 million, principally reflecting lower metal prices, partly offset by higher volumes. Average copper prices declined 17.2% on the LME and 17.9% on COMEX; molybdenum and silver prices fell 15.3% and 18.4%, respectively.
- Copper sales volume rose 12.6% to 371.8 million pounds and mined copper production rose 8.9% to 391.6 million pounds, led by Buenavista. Despite that growth, operating costs and expenses increased 5.9% to $837.9 million, and operating income declined 22.4%.
- Operating cash cost per pound, a company-defined non-GAAP measure, improved to $1.66 before by-product credits from $1.83; after by-product credits it was $0.98 versus $0.99. Lower by-product prices largely offset cost savings.
- Zinc production declined 27.0%, attributed to a transformer issue at Charcas and flooding at Santa Eulalia, which was expected to disrupt operations through June 2015. Silver production decreased 6.5%; molybdenum production increased 5.3%.
- Peruvian operations’ sales fell 14.7% and operating income fell 33.3%. Mexican open-pit sales increased 2.5%, but operating income declined 16.8% as costs rose. IMMSA operating income fell 72.7%.
Outlook, projects, risks, and unusual items
- Management forecast 2015 copper production of 782,300 tons, including 344,700 tons at Buenavista, and molybdenum production of 21,500 tons. It also expected 12.7 million ounces of silver and 86,200 tons of zinc. These are forecasts, not results.
- Management expected the copper market to move toward a deficit during 2015, while acknowledging uncertainty around prices, supply, demand, and project delays. It anticipated lower molybdenum prices amid supply growth and weaker oil-drilling demand, and described longer-term zinc fundamentals as favorable.
- The company is pursuing a plan to increase copper capacity from its 2013 production level of 617,000 tons to 1.165 million tons by 2018. Buenavista’s new SX-EW III plant had reached its estimated annual capacity of 120,000 tons; its new concentrator was 96% complete and expected to finish in Q3 2015. The $1.4 billion Tia Maria project remained delayed pending resolution of community differences and construction permits. Toquepala’s expansion construction permit was approved in April 2015.
- On April 20, 2015, the company issued $2.0 billion of senior unsecured notes: $500 million due 2025 at 3.875% and $1.5 billion due 2045 at 5.875%. Proceeds were intended for general corporate purposes, including capital spending. The board also authorized a $0.10-per-share dividend payable May 27, 2015.
- Buenavista spill: The August 2014 spill of approximately 40,000 cubic meters of copper sulfate solution led to remediation, administrative proceedings, a criminal complaint, and three collective-action lawsuits. By March 31, the company estimated contingent liability of $97.3 million; approximately $74.9 million had been deposited in a remediation trust and $16.4 million paid before the trust was established. PROFEPA imposed fines totaling approximately $1.7 million in March 2015. The company said it did not expect the proceedings to materially affect its financial position or results, but further sanctions or claims remained possible.
- Other contingencies include Peruvian labor-share lawsuits for which the company recorded no provision, stating that the amount could not be reasonably estimated and that it had defenses. Long-running strikes continued to suspend operations at the San Martin and Taxco mines. Peruvian union agreements were due to expire in the second half of 2015, with negotiations expected to begin in Q2.
- Controls: Management concluded disclosure controls were not effective at March 31 because of a material weakness in access controls and segregation of duties in the Mexican operations’ legacy Ellipse system. SAP was implemented in Mexico in February; remediation and testing were expected to continue through 2015, with management targeting completion by year-end. Management nevertheless stated that the filed financial statements fairly presented the company’s financial position and results in all material respects.
- The interim statements were reviewed by the independent accounting firm, not audited; the review report stated it was not aware of material modifications needed for GAAP conformity.
Important facts for investors to verify
- Whether 2015 production guidance and project schedules were achieved, especially at Buenavista, Tia Maria, and Toquepala.
- Exposure to metal prices: management estimated that, for the remaining nine months of 2015, a $0.10-per-pound copper price change would change SCC-attributable net income by about $76.6 million, subject to stated assumptions.
- The ultimate cost, remediation progress, claims, fines, and litigation outcomes related to the Buenavista spill.
- Progress and independent validation of the internal-control remediation, including SAP access controls and segregation of duties.
- Liquidity and debt-service needs after the $2.0 billion note issuance, use of proceeds, and repayment of the $200 million note due July 2015.
- Whether operating cash generation can support the capital program, dividends, and repurchases, given Q1 operating cash flow of $221.5 million versus capital investment of $245.8 million.