Southern Copper Corporation — Form 10-Q Summary
Business and period: Copper-focused miner with principal operations in Peru and Mexico, plus copper by-products including molybdenum, silver and zinc. This unaudited report covers the quarter and nine months ended September 30, 2013, compared with the same 2012 periods. The interim statements received an independent accountant review, not an audit.
Financial and operating performance
Amounts below are in U.S. dollars; financial amounts are in millions except per-share figures.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $1,384.5 | $1,552.4 | $4,417.7 | $5,018.2 |
| Operating income | $580.9 | $447.8 | $1,916.2 | $2,296.3 |
| Operating margin | 42.0% | 28.8% | 43.4% | 45.8% |
| Net income attributable to SCC | $344.2 | $217.9 | $1,212.4 | $1,402.8 |
| EPS, basic and diluted | $0.41 | $0.26 | $1.44 | $1.65 |
| Operating cash flow | $467.2 | $699.7 | $1,367.6 | $1,797.2 |
| Capital expenditures | $488.2 | $258.2 | $1,190.5 | $665.9 |
- Margins and comparability: Q3 reported operating income increased despite lower sales, but Q3 2012 included $316.2 million of legal fees from the shareholder derivative lawsuit. Excluding that one-time charge, prior-year Q3 operating income was approximately $764.0 million, making 2013 operating income lower on that basis. Nine-month SCC net income declined 13.6%; management attributed the decline mainly to weaker metal prices.
- Prices and volumes: Nine-month average LME copper price fell 7.2% to $3.35/lb; molybdenum fell 20.2%, silver 19.2% and zinc 1.1%. Copper sales volume declined 4.5% for the quarter and 4.5% for the nine months. Nine-month mined copper output fell 5%; molybdenum and zinc production increased 2.0% and 13.4%, respectively.
- Costs: Non-GAAP operating cash cost rose to $1.79/lb in Q3 from $1.67, and to $1.92/lb for nine months from $1.70. Management cited inflation in fuel, power, labor and other inputs, as well as lower copper production. By-product revenue, excluded from this cash-cost measure, was $902.3 million for the nine months versus $1,102.7 million.
- Cash flow and investment: Nine-month operating cash flow was $1,367.6 million; capital spending was $1,190.5 million, implying approximately $177.1 million of operating cash flow after capital expenditures. Investing activities used $1,401.4 million, including net purchases of short-term investments. Cash declined $664.2 million from year-end to $1,795.3 million.
- Liquidity and debt: At September 30, cash and cash equivalents were $1,795.3 million and short-term investments $363.5 million. Current assets were $3,730.2 million against current liabilities of $736.0 million. Long-term debt was $4,204.6 million; including current debt, total debt was approximately $4,209.6 million. Interest expense increased, largely reflecting $1.5 billion of notes issued in November 2012.
- Shareholder returns: The company paid $473.1 million in dividends and repurchased $124.0 million of shares during the first nine months. The Board approved a $0.12 per-share dividend for payment in November and increased the authorized repurchase program from $1 billion to $2 billion in October 2013.
Outlook, material developments and risks
- Management reduced 2013 copper production guidance from 640,000 to 630,000 metric tons, including approximately 610,000 tons from its mines and 20,000 tons from third-party concentrates. It raised molybdenum guidance to 19,000 tons and zinc to 100,500 tons, and lowered silver guidance to 15.5 million ounces.
- The Buenavista expansion program has a $3.1 billion budget and is intended to raise annual copper production from 180,000 to 495,000 tons by 2016. The new concentrator was 56.4% complete; SXEW III was 72.2% complete and expected to start in the first half of 2014. Project schedules and output remain estimates and depend on execution and approvals.
- Management cited lower Buenavista production after a temporary flooding disruption, which it said was resolved, and lower Toquepala ore grades and recoveries. Copper prices, production levels, operating-cost inflation, foreign exchange and labor conditions remain key sensitivities. A $0.01/lb change in copper price was estimated to change annual SCC net income by $7.9 million, assuming production and other factors remain constant.
- Tia Maria, an investment project exceeding $1 billion, remained suspended following community protests and governmental action. A revised environmental impact study was in preparation; operations were rescheduled to begin in 2016, contingent on approvals. The company reported $505.9 million of cumulative spending, of which $189.5 million had been reassigned to other operations.
- Peru’s stricter sulfur dioxide air-quality standard was scheduled to take effect January 1, 2014. The company said available technology could not meet the 20 micrograms/m³ limit, while asserting that applicable rules would allow the Ilo smelter to continue operating; regulatory outcome and compliance options remain uncertain.
- Proposed Mexican tax changes discussed by management included a 7.5% tax on mining earnings, a 0.5% tax on precious-metals revenue and limits on exploration-cost deductibility. Management warned enactment could affect investment plans; these were proposals, not reported enacted changes.
- Material contingencies include Peruvian former-employee labor-share lawsuits, for which the company made no provision because it asserted defenses and said the amount could not be reasonably estimated; disputes over Tia Maria concessions and a Peruvian tailings-dam area; and prolonged strikes at the San Martin and Taxco mines in Mexico, which remained suspended. The company also disclosed environmental remediation commitments and related-party transactions, including a $161.2 million receivable from Grupo Mexico affiliate MGE.
Important facts for investors to verify
- Whether copper production meets revised 2013 guidance and whether Buenavista’s flooding-related disruption is fully resolved.
- Actual progress, remaining capital requirements and commissioning dates for Buenavista and other expansion projects, and the expected funding mix.
- Metal-price and cost assumptions behind earnings and cash-cost trends, including the volatility of by-product revenue.
- Developments in Mexican tax proposals, Peru’s Ilo air-quality requirements, and Tia Maria permitting and community engagement.
- Potential outcomes and financial exposure from labor-share litigation, mine strikes and other legal or environmental contingencies; several exposures are not quantified clearly in the filing.
- Repurchase and dividend pace relative to cash generation, debt service and the company’s substantial capital program.