Southern Copper Corporation — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also reports unaudited fourth-quarter results. Unless otherwise indicated, financial amounts are U.S. dollars.
Business context
Southern Copper is an integrated copper producer operating mines, smelters and refineries in Peru and Mexico. It also produces molybdenum, silver, zinc and other products. Its three reportable segments are Peruvian operations, Mexican open-pit operations and Mexican underground operations (IMMSA). Grupo Mexico indirectly owned 82.3% of the company at year-end.
Financial and operating performance
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net sales | $5.953 billion | $6.669 billion | Down 10.7% |
| Operating income | $2.532 billion | $3.109 billion | Down $576.8 million |
| Net income attributable to SCC | $1.619 billion | $1.935 billion | Down 16.3% |
| Diluted earnings per share | $1.92 | $2.28 | Down $0.36 |
| Gross margin | 45.1% | 53.6% | Down 8.5 percentage points |
| Operating margin | 42.5% | 46.6% | Down 4.1 percentage points |
| Net margin | 27.2% | 29.0% | Down 1.8 percentage points |
| Cash provided by operations | $1.857 billion | $2.004 billion | Down $146.8 million |
| Capital expenditures | $1.703 billion | $1.052 billion | Up 61.9% |
Revenue and earnings declined chiefly as metal prices weakened: average LME copper fell 8.0% to $3.32 per pound, molybdenum fell 18.7%, silver fell 23.6%, and zinc fell 1.1%. Lower copper sales volume also contributed. Copper represented 78.2% of 2013 net sales.
Copper mine production was 1.360 billion pounds, down 3.2%; molybdenum production rose 8.7% to 43.9 million pounds, and zinc production rose 10.6% to 219.1 million pounds. Silver mine production declined 1.0% to 13.5 million ounces. Buenavista flooding reduced estimated copper sales by approximately 50.6 million pounds; operations returned to full capacity by the end of the third quarter.
Operating cash cost per pound of copper, a company-defined non-GAAP measure, rose to $1.92 before by-product credits from $1.73, and to $1.00 after by-product credits from $0.69. Management cited higher labor, fuel, power and operating-material costs, and lower by-product prices.
At December 31, 2013, cash and cash equivalents were $1.673 billion, short-term investments $208.3 million, total current assets $3.416 billion and current liabilities $783.6 million; the reported current ratio was 4.36. Total debt was $4.205 billion and equity $5.562 billion. Debt was primarily fixed-rate notes, with $200 million due in 2015 and most remaining principal due thereafter. The filing reports net debt/net capitalization of 31.3%, versus 26.8% in 2012, but its net-debt reconciliation uses cash of $1.6277 billion, which differs from balance-sheet cash; verify the calculation.
For the fourth quarter of 2013, net sales were $1.535 billion, operating income $615.9 million, net income $407.5 million and net income attributable to SCC $406.2 million ($0.48 per share). Versus fourth-quarter 2012, sales declined from $1.651 billion, operating income from $812.6 million and attributable net income from $531.8 million.
Material changes, outlook and commentary
- Capital spending reached a record $1.703 billion in 2013; management planned approximately $2.3 billion for 2014. The growth program targets copper production capacity of approximately 1.175 million tons by 2017, about 87% above the stated 630,000-ton baseline.
- Buenavista’s expansion was expected to add a 120,000-ton-per-year SX-EW plant in the second quarter of 2014 and a concentrator expansion adding 188,000 tons per year by 2015. Management forecast 2014 copper mine production of 672,400 tons, molybdenum of 21,500 tons, silver of 16.3 million ounces and zinc of 95,200 tons.
- Management expected Tia Maria, a 120,000-ton-per-year project, to begin production late in 2016, subject to environmental approval and permits. The Toquepala expansion was expected to add 100,000 tons of annual copper production, following community agreements. Project schedules and returns remain subject to approvals, execution and other uncertainties.
- Mexican tax changes effective in 2014 include a 7.5% mining royalty on taxable EBITDA, a 0.5% royalty on gold, silver and platinum sales, higher water-use charges, and other tax changes. The company estimated approximately $53 million after-tax cost for the EBITDA royalty at a $3.50 copper price, approximately $20 million annual after-tax water-cost impact, and approximately $6 million annual fossil-fuel environmental tax cost. It recorded a $34.7 million deferred tax charge related to the changes.
- Risks include volatile metal prices, energy and labor costs, water availability, foreign-exchange and country risks, mine slope stability, reserve and exploration uncertainty, stricter environmental requirements, and community opposition or project delays. Taxco and San Martin mines in Mexico remained on strike since July 2007.
- Contingencies include Peruvian lawsuits over historical labor shares, whose potential amount management said could not be reasonably estimated; litigation relating to Tia Maria concessions and the Pasto Grande tailings facility; and continuing environmental remediation at the closed San Luis Potosi smelter. The filing states that management believes its defenses are meritorious and does not consider the Tia Maria project impaired.
- 2012 included unusual items from the shareholder derivative lawsuit: SCC received $2.108 billion from its controlling shareholder and recorded $316.2 million of related legal fees. These items make some 2012 cash-flow, dividend and earnings comparisons atypical. 2013 dividends were $0.68 per share, compared with $4.06 in 2012, which included a large special distribution and stock dividend.
Most important facts for investors to verify
- Reconcile the stated net debt calculation with balance-sheet cash and the cash figure used in the filing’s net-debt table.
- Track metal prices, realized prices, production volumes and cash costs, particularly recovery from Buenavista flooding and the effect of lower by-product prices.
- Test the funding and delivery assumptions behind the $2.3 billion 2014 capital plan and the Buenavista, Toquepala and Tia Maria project timetables.
- Assess the financial and operational consequences of Mexican tax and water-charge changes, energy commitments, environmental obligations and community agreements.
- Review developments in labor strikes and material litigation, especially the unquantified Peruvian labor-share claims and Tia Maria-related matters.
- Consider related-party exposure and governance: Grupo Mexico controls 82.3%, and the filing reports significant affiliate transactions, including a $161.2 million receivable from MGE.
The independent auditor issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting as of December 31, 2013.