Southern Copper Corporation — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual filing; the supplied text does not provide a standalone fourth-quarter income statement. Southern Copper is an integrated copper producer operating mines, smelters and refineries in Peru and Mexico, with exploration elsewhere in Latin America. Grupo Mexico indirectly owned 88.9% of the company.
Financial and operating highlights
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Net sales | $10.934 billion | $7.985 billion | Up 36.9% |
| Operating income | $6.065 billion | $3.121 billion | Up $2.944 billion |
| Net income attributable to SCC | $3.397 billion | $1.570 billion | Up 116.3% |
| Diluted earnings per share | $4.39 | $2.03 | Up $2.36 |
| Net cash from operating activities | $4.292 billion | $2.784 billion | Up $1.509 billion |
| Capital investments | $892.3 million | $592.2 million | Up 50.7% |
Operating margin was approximately 55.5% and net income margin was 31.1%. Sales growth chiefly reflected higher realized market prices: average LME copper rose 51.1% to $4.23/lb, molybdenum 81.0% to $15.51/lb, silver 22.1% to $25.18/oz and zinc 32.0% to $1.36/lb. Lower copper sales volumes partly offset price gains.
- Production: Mined copper fell 4.3% to 2.112 billion lb; silver fell 12.0% to 19.0 million oz; zinc fell 2.9% to 147.6 million lb. Molybdenum was essentially flat at 66.7 million lb.
- Cash costs: Company-defined non-GAAP cash cost was $1.64/lb of copper before by-product credits, versus $1.37 in 2020; net of by-product credits it was $0.67/lb, versus $0.69. The latter benefited from higher by-product revenues, particularly molybdenum.
- Liquidity: Cash and cash equivalents were $3.002 billion and short-term investments $486.9 million, totaling $3.489 billion. Current assets were $6.140 billion versus current liabilities of $2.250 billion; the current ratio was 2.73.
- Debt: Total debt was $6.548 billion, broadly unchanged from 2020; net debt was $3.059 billion. Net debt to net capitalization improved to 27.1% from 35.2%. Debt is dollar-denominated at fixed rates, weighted average 5.71%; $300 million of notes were due in 2022.
- Cash returns: Dividends paid were $2.474 billion, or $3.20/share, versus $1.160 billion and $1.50/share in 2020. The board subsequently authorized a $1.00/share dividend for payment March 2, 2022. No share repurchases had occurred under the program since 2016.
Material changes versus prior year
- Net sales and attributable earnings increased sharply as commodity prices rose, while total operating costs and expenses were nearly flat at $4.869 billion versus $4.864 billion.
- Operating cash flow increased to $4.292 billion. Accounts payable and accrued liabilities contributed $558.2 million to operating cash flow, while higher receivables reduced it by $289.8 million.
- Cash and cash equivalents increased by $818.4 million. Financing cash outflow rose to $2.480 billion, principally reflecting the larger dividend distribution; investing outflow was $972.9 million.
- Copper production declined because of lower grades and recoveries at Toquepala and lower grades at La Caridad and Buenavista. Mined silver also declined, while copper rod output increased 16.0%.
- The company recorded $2.299 billion of income tax provision, including mining royalties and special mining taxes; the reported effective tax rate was 40.4%, down from 42.8%.
Outlook, risks and unusual items
- Management outlook: 2022 copper production was forecast at 922,000 tonnes, down 3.8% from 2021, due to temporarily lower grades and recoveries in Peru. Management expected production to recover to 992,000 tonnes in 2023. 2022 guidance also included 25,100 tonnes of molybdenum, 19.0 million oz of silver and 71,200 tonnes of mined zinc.
- The board approved a 2022 capital investment program of $1.542 billion. Projects include Pilares, expected to begin production in the second half of 2022; Buenavista Zinc and El Pilar, expected to start in 2023; and the Tia Maria project in Peru, whose construction timing remains uncertain. Management’s longer-term ambition is to reach 1.8 million tonnes of annual copper production by the end of the decade.
- Key sensitivities include volatile copper and by-product prices, ore grades and recoveries, fuel and power costs, water availability, shipping constraints, exchange rates and political, regulatory and community conditions in Peru and Mexico. Fuel, gas and power represented approximately 31% of production cost in 2021.
- Material project and legal exposures include Tia Maria’s community acceptance and pending lawsuits; environmental and civil litigation relating to the 2014 Buenavista spill; and the Guaymas sulfuric-acid terminal matter. Following a January 2022 decision, a partial temporary shutdown remained pending resolution, with the company stating it expected no operational impact. The Taxco mine remained suspended amid a strike dating to 2007; Santa Eulalia was temporarily suspended after flooding.
- In March 2021, a ransomware attack affected 420 servers and devices. The company reported restoring affected servers, no concrete evidence of stolen information and $0.3 million of direct costs.
- Notable accounting judgments include recoverability of leach-pad ore stockpiles ($1.357 billion including current and long-term balances) and impairment indicators for Tia Maria. Auditors issued unqualified opinions on the financial statements and internal control; critical audit matters included leach-pad stockpile valuation and Tia Maria impairment indicators.
Most important facts for investors to verify
- Whether 2022 production guidance and the expected 2023 recovery are achieved, especially in Peru, and how grade and recovery trends affect unit costs.
- Whether higher capital spending, project schedules and expected returns remain on track, including Pilares, Buenavista Zinc, El Pilar and Tia Maria; verify permitting, community support and remaining funding needs.
- Commodity-price and by-product exposure: management estimated that a $0.10/lb copper-price change would change annual net income by about $119.4 million, assuming stated production, sales and tax assumptions.
- Debt maturity and liquidity management, dividend sustainability, and the effect of planned investment spending on cash balances and net debt.
- Developments in significant legal, environmental, labor and tax matters, plus the company’s related-party transactions and governance under Grupo Mexico’s controlling ownership.
- Leach-stockpile recovery assumptions, mineral reserve estimates and project impairment assumptions; the filing notes that resources are not reserves and may not be economically recoverable.