Southern Copper Corporation — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; balance-sheet comparisons are to December 31, 2022. Unaudited interim statements were reviewed by the independent accountant, not audited. SCC is an integrated copper and by-product producer operating mainly in Peru and Mexico; Grupo Mexico indirectly owned 88.9% at quarter-end.
Financial and operating performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $2,300.7 million | $2,306.9 million | $5,094.6 million | $5,070.7 million |
| Operating income | $900.7 million | $808.5 million | $2,254.4 million | $2,278.6 million |
| Net income attributable to SCC | $547.5 million | $432.3 million | $1,360.7 million | $1,217.1 million |
| Diluted earnings per share | $0.71 | $0.56 | $1.76 | $1.57 |
| Cash provided by operations | $797.1 million | $309.9 million | $1,982.3 million | $1,130.6 million |
| Capital expenditures | $252.5 million | $224.6 million | $490.6 million | $429.7 million |
Q2 operating margin was approximately 39.1% versus 35.0%; net margin attributable to SCC was approximately 23.8% versus 18.7% (calculated from reported figures). First-half operating margin was approximately 44.3% versus 44.9%; attributable net margin was approximately 26.7% versus 24.0%.
At June 30, cash and cash equivalents were $2,199.0 million, short-term investments $0.3 million, current assets $4,769.6 million and current liabilities $1,060.6 million (current ratio approximately 4.5). Long-term debt was $6,252.9 million; cash less long-term debt implies net debt of approximately $4,053.9 million. The filing reports no current debt balance separately. Total assets were $16,939.5 million and total equity $7,962.6 million.
Changes versus comparable periods
- Q2 sales were nearly flat (-0.3%), while SCC-attributable net income rose 26.6% and operating income rose 11.4%. Management attributed earnings growth chiefly to lower operating costs, including reduced purchases of third-party copper concentrates, and higher copper and zinc sales volumes.
- For the first half, sales increased 0.5% and attributable net income increased 11.8%, but operating income declined 1.1%. Lower copper and zinc prices were partly offset by higher sales volumes; lower income-tax expense also supported earnings.
- Q2 LME copper averaged $3.85/lb, down 10.9% year over year; zinc averaged $1.15/lb, down 35.4%. Molybdenum and silver prices rose 14.0% and 7.1%, respectively.
- Mined copper production increased 9.2% in Q2 and 6.6% in the first half. First-half molybdenum production fell 4.6%; silver and zinc production increased 5.6% and 8.1%.
- First-half operating cash flow increased $851.7 million year over year, reflecting higher net income and a more favorable change in operating assets and liabilities, including receivables and payables. Investing outflow increased to $282.5 million, while financing outflow was $1,550.5 million, principally dividends.
Outlook, risks and notable items
- Production outlook: Management expects 2023 production of 932,100 tonnes of copper (+4.2% versus 2022), 24,200 tonnes of molybdenum (-7.6%), 20.1 million ounces of silver (+8.1%) and 108,000 tonnes of zinc (+80%). It expects zinc production above 200,000 tonnes annually from 2024 onward. These are forward-looking estimates, not guarantees.
- Projects and spending: First-half capital investment was $490.6 million; approximately $504.2 million of capital-project commitments remained at June 30. Buenavista Zinc was 98% complete, with startup expected in August 2023; Pilares was operating and delivering copper mineral to La Caridad. El Pilar production is expected in 2025. Capital plans may be adjusted for economic and market conditions.
- Markets and costs: Management cited a softer copper-price outlook and expected 2023 market surplus of about 100,000 tonnes, while noting low inventories and expected long-term demand support from the clean-energy transition. Q2 net cash cost per pound, after by-product credits, was $1.12 versus $1.10; first-half cost was reported as $0.94 versus $0.82 in the narrative summary. These are non-GAAP measures.
- Legal and regulatory exposures: Tia Maria faces five Peruvian lawsuits, including challenges to approvals; management says the potential contingency cannot currently be reasonably estimated. Litigation also remains over the 2014 Buenavista spill; the company says damages are not presently determinable and does not expect the proceedings to materially affect financial position or results. A partial temporary shutdown affecting sulfuric-acid storage and transport at Guaymas remained pending; the company reported no expected operational impact. The Taxco mine remained suspended amid a long-running strike; San Martin labor proceedings and a U.S. rapid-response labor complaint also remain unresolved.
- Other contingencies and risks: Peru’s mine-closure guarantee regulation under a 2021 law had not yet been published, so the financial impact could not be fully estimated. Mexico’s proposed mining-law changes could affect concessions, water use, closure guarantees, community contributions and exploration; management could not assure there would be no effect on current business or growth plans. Metal prices, local currencies and inflation, labor relations, permitting, environmental matters and foreign political and economic conditions are key risks.
- Dividends and controls: The company paid $2.00 per share in first-half 2023 dividends versus $2.25 a year earlier. A further $1.00-per-share dividend was authorized July 20, payable August 23, 2023. Management concluded disclosure controls were effective at June 30; no material change in internal control was reported. No material cybersecurity incidents were reported in the first half.
Important facts for investors to verify
- Track copper, zinc and by-product prices and volumes against management’s 2023 production forecasts; copper and zinc price declines outweighed volume gains in sales.
- Monitor project commissioning, costs and timing, especially Buenavista Zinc, and confirm whether expected production and spending milestones are achieved.
- Review the status and potential financial or operating consequences of the Tia Maria, Buenavista spill, Guaymas, and labor matters, along with the pending Peruvian mine-closure regulation and Mexican mining-law changes.
- Reconcile the first-half 2022 net cash cost per pound after by-product credits: the MD&A summary states $0.82, while the detailed reconciliation table states $0.83. The filing does not provide a clear consistent comparative value.
- Assess capital commitments, dividend payments and leverage against cash generation; first-half dividends of $1,546.2 million were substantial relative to operating cash flow of $1,982.3 million.