Business Context and Reporting Period
This Form 8-K, filed on August 9, 2011, reports on events occurring on August 2, 2011, and includes a transcript of Southern Copper Corporation's (SCC) Second Quarter 2011 earnings conference call. The company is a major producer of copper, molybdenum, and other by-products with operations primarily in Mexico and Peru. The filing also addresses a proposed all-stock business combination with its parent company, Americas Mining Corporation (AMC), and updates on capital projects and labor relations.
Key Financial Metrics (Q2 2011)
- Revenue: $1.8 billion (up 54% from Q2 2010).
- Net Income: $658 million attributable to shareholders (up 110% from Q2 2010).
- Earnings Per Share (Diluted): $0.78 (up from $0.37 in Q2 2010).
- EBITDA: $1.1 billion (up 78.8% from Q2 2010).
- Operating Cash Cost: $0.367 per pound (including by-product credits); $1.67 per pound (before by-product credits).
- Capital Expenditures (Q2): $110.7 million.
- Capital Expenditures (H1 2011): $183.6 million.
- Share Repurchases: 4.6 million shares acquired in June 2011 at an average price of $32.32 per share ($148 million total).
- Dividend: $0.62 per share declared for payment on August 31, 2011.
Material Changes vs. Prior Period
- Production Growth: Copper mined production increased 28.8% year-over-year to 146,241 tons, driven by the Buenavista mine operating at full capacity. Molybdenum production decreased 18.3% year-over-year due to lower ore grades at Peruvian operations.
- Cost Structure: Total operating costs decreased 4% quarter-over-quarter, primarily due to a $204 million reduction in purchased copper concentrates replaced by internal production. However, inflation in fuel, power, and labor offset some savings.
- Working Capital: A significant cash outflow of $543.3 million occurred due to working capital variances, including a $132 million increase in accounts receivable and a $68.4 million increase in inventories, alongside annual tax and profit-sharing payments.
- Repair Costs: Estimated total repair costs for the Buenavista operation were revised upward from $114 million to $174 million.
Guidance, Outlook, and Risks
- Production Guidance: Maintained 2011 copper production guidance at 630,000 tons (including ~7.7% from third-party concentrates). 2012 guidance is projected at approximately 660,000 tons. Long-term targets include 850,000 tons in 2013 and over 1 million tons by 2014-2015.
- Capital Spending: Revised 2011 CAPEX forecast to approximately $700 million (down from a $1.7 billion budget due to project delays). The 5-year (2011-2015) capital program is estimated at $5.5 billion, with $2.2 billion planned for 2012.
- Merger Status: A special committee of independent directors is evaluating a non-binding proposal from AMC for an all-stock merger. No definitive agreement has been reached, and no specific deadline exists.
- Project Updates:
- Tia Maria (Peru): Project suspended pending regulatory and community approval; management is optimistic about restarting construction by late 2011 or early 2012.
- Toquepala (Peru): Expansion scope under review; completion rescheduled to H2 2013.
- Buenavista (Mexico): Aggressive expansion underway to increase capacity from 180,000 to over 450,000 tons annually.
- Risks: Macroeconomic instability (US debt ceiling, European debt crisis), metal price volatility, regulatory approvals for Peruvian projects, labor relations, and cost inflation.
Investor Verification Checklist
- Verify the status of the Tia Maria project environmental impact assessment and community relations in Peru.
- Confirm the timeline and regulatory approval status for the proposed merger with Americas Mining Corporation (AMC).
- Monitor the execution of the $2.2 billion CAPEX plan for 2012 and potential cost overruns on major projects like Toquepala and the new Buenavista concentrator.
- Track the impact of rising input costs (fuel, power, labor) on the company's ability to maintain low operating cash costs.
- Review the upcoming Proxy Statement regarding the proposed AMC transaction for detailed terms and voting procedures.