Southern Copper Corporation — Q3 2010 Form 10-Q
Reporting period: Three and nine months ended September 30, 2010. Southern Copper produces copper and by-products in Peru and Mexico and is 80% indirectly owned by Grupo Mexico. Financial statements are unaudited interim statements reviewed by the independent accountants, not audited.
Financial performance and position
Amounts below are in millions of U.S. dollars except per-share data, percentages, and where noted.
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Net sales | $1,257.9 | $1,151.8 | $3,650.5 | $2,598.3 |
| Operating income | $602.9 | $508.7 | $1,752.1 | $956.1 |
| Net income attributable to SCC | $365.2 | $312.5 | $1,061.8 | $566.1 |
| EPS, basic and diluted | $0.43 | $0.37 | $1.25 | $0.67 |
| Operating margin | 47.9% | 44.2% | 48.0% | 36.8% |
| Net margin attributable to SCC | 29.0% | 27.1% | 29.1% | 21.8% |
- Revenue and earnings: Q3 sales rose 9.2% and SCC-attributable income rose 16.9% year over year; nine-month sales rose 40.5% and attributable income rose 87.6%. Higher metal prices were the main driver, with higher nine-month molybdenum sales also contributing. Q3 copper sales volume fell 4.9%; nine-month volume fell 4.5%.
- Prices and production: Average LME copper prices were $3.29/lb in Q3 and $3.25/lb for nine months, up 23.7% and 54.0%, respectively, year over year. Q3 mined copper production increased 4.1% to 276.0 million pounds, but nine-month production declined to 767.2 million pounds from 792.1 million. Management reported nine-month operating cash cost, net of by-product credits, of $0.145/lb versus $0.369/lb in 2009; this is a company-defined non-GAAP measure.
- Cash flow: Nine-month operating cash flow was $1,368.9, versus $296.7 in 2009; management attributed the increase to higher earnings and a favorable $594.2 working-capital comparison. Capital expenditures were $281.2 versus $316.7. Cash and equivalents at September 30 were $2,236.7.
- Liquidity and debt: Current assets were $3,263.1 and current liabilities $677.2 (current ratio about 4.8). Total debt was $2,765.3, compared with $1,280.3 at year-end 2009; the filing reports debt-to-total-capitalization of 41.5%, up from 24.7%. The increase principally reflects $1.5 billion of notes issued in April: $400 million due 2020 at 5.375% and $1.1 billion due 2040 at 6.75%. Cash and short-term investments totaled $2,296.1 at quarter-end.
- Dividends: The company paid $0.37/share in Q3; nine-month dividends were $1.25/share. On October 27, the board authorized $0.43/share, payable November 30, 2010.
Material changes and operating developments
- Q3 operating income increased 18.5%, while nine-month operating income rose 83.3%. Higher copper and by-product prices substantially lifted results; higher labor, power, fuel, repair and workers’ participation costs partly offset the benefit.
- Mexican open-pit operations benefited from higher prices and Cananea’s partial restart. Cananea had reached about 30% capacity; management expected full production by February 2011. Repairs were estimated at $114 million, with some costs expected to be covered by insurance.
- IMMSA Q3 sales declined 33.2%, mainly because of lower copper, zinc and silver sales volumes. Flooding at the Santa Eulalia mine reduced zinc production; management expected restoration by April 2011.
- Q3 capital expenditures were $112.9, compared with $110.6 a year earlier. Nine-month expenditures were lower year over year.
Outlook, risks and unusual items
- Management outlook: The company forecast 2010 copper production of about 1.1 billion pounds and annual average copper price of $3.31/lb. It estimated full-year 2010 operating cash cost, net of by-product credits, at $0.18/lb and capital expenditures at $450 million. It expected Q4 sales of about 300 million pounds of copper and 45.1 million pounds of molybdenum, barring disruption. Management was reviewing its 2011 production plan.
- Hedging and market exposure: Management described a long-term favorable copper outlook but noted uncertainty around U.S. and European recovery and Chinese growth. Copper swaps covered about 58% of expected Q4 2010 production at $3.67/lb and 11% of 2011 production at $3.73/lb; collars covered about 16% of 2011 production, with a $3.00 floor and $4.54 cap. The filing says contracts were entered from September 29 through October 26, 2010, so some were entered after quarter-end. Metal-price, foreign-exchange, and interest-rate movements remain material risks.
- Projects and approvals: Planned Peru and Mexico projects totaled approximately $1.8 billion and $3.8 billion, respectively, and were expected, when completed, to add about 1.3 billion pounds of copper capacity and 12.3 million pounds of molybdenum capacity. Timelines depend on construction, permits and approvals; Tia Maria’s environmental approval remained pending, with construction then planned for 2011 and production for mid-2012. These are estimates, not assured outcomes.
- Labor, environmental and legal matters: Cananea restoration and labor disruptions at Mexican sites affected operations and costs; La Caridad returned to normal operations in October after access-road blockages. The company recorded an asset-retirement obligation of $60.1 million. It had not yet determined remediation costs for the closed San Luis Potosi smelter site. Peruvian former-worker labor-share claims were not accrued because the company asserted defenses and said the contingency could not be reasonably estimated. Other litigation includes claims concerning the Tia Maria concessions, the Pasta de Conchos accident, and proposed corporate transactions; outcomes are uncertain.
- Proposed combination and related parties: Parent affiliate AMC made a non-binding all-stock proposal to combine with Southern Copper at an exchange ratio of 1.237 AMC shares per SCC share. An independent-director special committee was evaluating it; shareholder lawsuits sought to block the transaction. The company also reported substantial ordinary-course related-party dealings and an outstanding $3.9 million guaranteed balance on an affiliate’s loan.
- Other unusual items: Q3 included $17.8 million of costs related to Cananea and La Caridad labor disruptions. Nine-month results included $2.5 million of severance costs related to the San Luis Potosi smelter closure. Interest expense increased following the new debt issuance. The filing reported no material change in risk factors during the quarter.
Important facts for investors to verify
- Whether Cananea reached full production on schedule, and the final repair cost and insurance recovery.
- Actual metal prices, production, sales volumes and non-GAAP cash costs versus management’s 2010 estimates.
- Project spending, permitting and construction progress, particularly Tia Maria and the Mexican expansions.
- Debt service, leverage, liquidity and the effect of future dividends and capital spending.
- Developments in labor actions, environmental remediation, litigation and the proposed AMC combination, including any resulting financial exposure.
- The eventual terms and allocation of U.S. tax liabilities within the AMC group; the filing said a tax-sharing agreement was still under discussion.