Business Context and Reporting Period
Company: Southern Peru Copper Corporation (SPCC)
Filing Type: Form 10-Q (Unaudited)
Period Ended: June 30, 2005
Key Event: On April 1, 2005, SPCC acquired Minera México (MM) from Americas Mining Corporation (a subsidiary of Grupo México) in a transaction accounted for as a pooling of interests. This acquisition increased SPCC's copper reserves by 107% and annual production capacity by 81%. Following the merger, Grupo México's indirect ownership increased to approximately 75.1%.
Key Financial Metrics
| Metric (in millions, except per share) | 3 Months Ended June 30, 2005 |
3 Months Ended June 30, 2004 |
6 Months Ended June 30, 2005 |
6 Months Ended June 30, 2004 |
|---|---|---|---|---|
| Net Sales | $958.0 | $722.2 | $1,904.1 | $1,324.7 |
| Operating Income | $448.5 | $342.1 | $920.1 | $614.2 |
| Net Earnings | $311.9 | $231.0 | $610.3 | $398.5 |
| Earnings Per Share (Basic/Diluted) | $2.12 | $1.57 | $4.15 | $2.71 |
| Operating Cash Flow | $192.0 | $298.3 | $534.3 | $437.3 |
| Cash and Equivalents (Balance Sheet) | $471.2 | $455.0 | $471.2 | $455.0 |
| Total Debt (Current + Long-term) | $1,111.7 | $1,330.3 | $1,111.7 | $1,330.3 |
| Debt to Total Capitalization | 27.2% | 32.0% | 27.2% | 32.0% |
Note: Debt figures derived from Balance Sheet current portion ($41.3M) and long-term debt ($1,070.4M) as of June 30, 2005. 2004 debt figures derived from Dec 31, 2004 balance sheet ($152.3M + $1,178.0M).
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 32.6% year-over-year for the quarter and 43.7% for the six-month period. This was driven primarily by higher metal prices (Copper up ~21%, Molybdenum up ~142%) and the inclusion of Minera México's results.
- Profitability: Net earnings rose 35% for the quarter and 53% for the six-month period. Operating margins improved due to high byproduct revenues (Molybdenum and Zinc) which offset higher operating costs.
- Cost Structure: Operating costs increased significantly due to higher fuel/power costs, increased mining royalties in Peru ($15.6M for six months), and a one-time $28.2M charge for Mexican workers' participation resulting from a change in the calculation base.
- Cash Flow: Operating cash flow for the quarter decreased 35.6% compared to 2004, primarily due to a $286M decrease in working capital contributions (payments of income taxes and workers' participation). However, six-month operating cash flow increased 22%.
- Debt Reduction: The company aggressively reduced debt, repaying $418.6M in the first six months of 2005, including the prepayment of Peruvian bonds and a portion of MM's credit facilities.
Guidance, Outlook, Risks, and Unusual Items
- Capital Projects: The Ilo smelter modernization project is the largest capital investment, estimated at $500 million total. $219.3M has been expended through June 30, 2005, with completion expected by January 2007.
- Dividends: The company paid a special transaction dividend of $100M in March 2005 and a regular dividend of $350M in May 2005. A subsequent dividend of $153.6M was declared in July 2005.
- Debt Issuance: On July 27, 2005 (post-period), the company issued $200M of 6.375% Notes due 2015 and $600M of 7.5% Notes due 2035 to repay credit facilities.
- Accounting Changes: The company is evaluating the impact of EITF Issue 04-06 regarding capitalized mine stripping costs. Adoption may require writing off a significant portion of the $315M capitalized stripping asset, potentially reducing equity and net income.
- Risks and Contingencies:
- Legal: Ongoing litigation regarding "labor shares" in Peru (Garcia-Ataucuri case) and a shareholder derivative suit regarding the MM merger. The company believes these claims are meritless.
- Regulatory: A new Peruvian royalty law (1-3% of sales) was upheld as constitutional. The company is protesting its application to SX/EW production under a stability agreement.
- Environmental: Significant capital expenditures are required for environmental compliance in Peru (Ilo smelter) and Mexico. New Peruvian laws regarding mine closure plans and financial guarantees are pending final regulation.
- Commodity Prices: Earnings are highly sensitive to copper and molybdenum prices. A $0.01/lb change in copper price impacts annual net earnings by approximately $9.4M.
Investor Verification Checklist
- Byproduct Revenue Impact: Verify the sustainability of Molybdenum prices, which currently provide a significant credit to operating cash costs (resulting in negative cash costs per pound when credited).
- Accounting Standard Adoption: Monitor the final decision on EITF 04-06 regarding mine stripping costs and the potential write-off of the $315M capitalized asset.
- Debt Refinancing: Confirm the terms and interest rates of the new $800M note issuance completed in late July 2005.
- Regulatory Royalties: Track the outcome of the company's protest regarding the application of the Peruvian royalty charge to its SX/EW operations.
- Capital Expenditures: Review progress and cost overruns on the $500M Ilo smelter modernization project.