Southern Copper Corporation - Q3 2007 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the three and nine months ended September 30, 2007. Southern Copper Corporation (SCC) operates in the mining industry, primarily producing copper, with significant by-products including molybdenum, zinc, silver, and gold. Operations are segmented into Peruvian open-pit operations, Mexican open-pit operations, and Mexican underground operations (IMMSA unit). The company is a large accelerated filer and is not a shell company.
Key Financial Metrics
| Metric (in millions, except per share) | 3 Months Ended Sep 30, 2007 | 9 Months Ended Sep 30, 2007 |
|---|---|---|
| Net Sales | $1,606.4 | $4,791.2 |
| Operating Income | $933.8 | $2,866.4 |
| Net Earnings | $627.8 | $1,905.5 |
| Earnings Per Share (Basic & Diluted) | $2.13 | $6.47 |
| Operating Cash Flow | $728.3 | $1,926.0 |
| Cash and Cash Equivalents | $1,195.2 | $1,195.2 |
| Total Debt (Current + Long-term) | $1,523.3 | $1,523.3 |
| Effective Tax Rate (9 Months) | 31.5% | 31.5% |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 13.7% in Q3 and 25.7% for the nine-month period compared to 2006. This was driven by higher metal prices (copper, molybdenum, silver) and increased sales volumes, particularly for molybdenum.
- Profitability: Net earnings rose 20.4% in Q3 and 37.8% for the nine-month period. The increase is attributed to higher sales volumes and prices, offset partially by a $73.7 million loss on derivative instruments in the nine-month period (primarily marketable securities).
- Production Volumes: Copper production decreased 2.4% in Q3 due to work stoppages at the Cananea mine in Mexico. Conversely, molybdenum production increased significantly (9.7 million lbs in Q3 vs. 5.1 million lbs in Q3 2006) due to higher grades and strike-free production at La Caridad.
- Costs: Operating costs increased due to higher production costs (power, fuel, materials) and higher workers' participation payments. Depreciation, amortization, and depletion increased due to the start-up of the modernized Ilo smelter.
Guidance, Outlook, Risks, and Unusual Items
- Capital Allocation: The Board suspended indefinitely previously announced expansion projects in Mexico (Cananea and Guaymas) totaling $2.256 billion due to labor instability. Instead, a new $2.108 billion investment program in Peru was approved to increase copper production by 270,000 tons annually by 2011.
- Dividends: A quarterly dividend of $2.00 per share ($588.9 million total) was approved on October 18, 2007, payable November 27, 2007.
- Derivative Losses: The company recorded a $73.7 million loss on derivative instruments for the nine months ended September 30, 2007, primarily related to leveraged, indexed marketable securities. On October 3, 2007, $300 million of these securities were liquidated for $276.4 million.
- Labor Risks: Significant work stoppages occurred at Mexican mines (Cananea, Taxco, San Martin) starting July 30, 2007, and brief strikes occurred in Peru. While operations in Peru resumed quickly, Mexican operations remained disrupted as of the filing date.
- Tax Matters: The company is subject to ongoing IRS audits regarding depreciation, inventory capitalization, and interest capitalization. A new Mexican flat tax law enacted in October 2007 will take effect in 2008.
Investor Verification Checklist
- Labor Disputes: Verify the status of the ongoing work stoppages at Cananea, Taxco, and San Martin mines and their impact on Q4 production guidance.
- Derivative Exposure: Confirm the final realized loss on the liquidation of marketable securities and the status of remaining embedded derivatives.
- Capital Projects: Monitor the execution of the new $2.1 billion Peruvian investment program and the indefinite suspension of Mexican expansion projects.
- Tax Contingencies: Review the resolution of the IRS audit regarding inventory capitalization and the potential impact of the new Mexican tax law on deferred tax assets.
- By-Product Pricing: Assess the sustainability of high molybdenum prices, which significantly reduced operating cash costs per pound in 2007.