Southern Copper Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016 unless otherwise noted. Southern Copper is an integrated copper and other-metals producer operating mainly in Peru and Mexico. Grupo Mexico indirectly owned 88.9% of the Company. Amounts below are in U.S. dollars.
Financial and operating performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $1,583.9 million | $1,245.1 million | +27.2% |
| Operating income | $570.4 million | $346.2 million | +64.8% |
| Net income attributable to SCC | $314.4 million | $185.1 million | +69.9% |
| Diluted earnings per share | $0.41 | $0.24 | +$0.17 |
| Net cash from operating activities | $490.1 million | $64.1 million | +$426.0 million |
| Capital investments | $245.6 million | $223.3 million | +10.0% |
| Cash dividends paid | $61.8 million | $23.2 million | +$38.6 million |
- Operating margin was approximately 36.0%, up from 27.8%; SCC net income margin was approximately 19.8%, up from 14.9%.
- Revenue and earnings growth primarily reflected stronger metal prices and higher copper and silver sales volumes. Average LME copper price rose 25.0% to $2.65/lb; molybdenum, zinc and silver prices rose 46.9%, 65.8% and 17.4%, respectively.
- Copper sales volume increased 3.9% to 487.7 million pounds, while mined copper production fell 3.6% to 471.2 million pounds. Lower grades and recoveries affected Cuajone, Buenavista and La Caridad. Zinc production increased 3.2%; molybdenum and silver production declined 5.3% and 2.4%.
- Operating costs and expenses rose 12.7% to $1,013.5 million, including higher cost of sales and depreciation. A $10.2 million reversal of previously accrued Sonora River remediation costs partially offset the increase.
- Non-GAAP operating cash cost was $1.49/lb before by-product credits, up 5.7%; after by-product revenues it was $0.88/lb, down 10.2%, principally reflecting stronger by-product prices.
- Effective tax rate increased to 36.3% from 33.8%, primarily due to higher forecast dividends from Minera Mexico and increased Mexican royalty taxes.
Balance sheet and liquidity
- At March 31, 2017, cash and cash equivalents were $698.7 million and short-term investments were $52.7 million. Current assets were $2,773.8 million against current liabilities of $989.5 million.
- Long-term debt was $5,954.9 million, largely unchanged from year-end 2016. Cash plus short-term investments totaled $751.4 million; debt less those balances was approximately $5.20 billion. The reported fair value of long-term debt was $6,491.8 million.
- Operating cash flow improved to $490.1 million from $64.1 million. Investing activities used $246.6 million, including $245.6 million of capital investments. Operating cash flow less capital investments was approximately $244.5 million.
- Cash increased by $152.7 million during the quarter to $698.7 million. The Company paid $0.08/share in February and, after quarter-end, authorized a $0.12/share dividend payable May 31, 2017.
Outlook, projects and material developments
- Management expected 2017 copper production of about 900,000 tons and projected 972,300 tons in 2018 as the new Toquepala concentrator ramps up. Longer-term plans target capacity above one million tons by mid-2018 and 1.5 million tons by 2023.
- 2017 production targets included 16.6 million ounces of silver, 80,800 tons of zinc and 20,300 tons of molybdenum. These are forward-looking estimates, not guarantees.
- The Toquepala concentrator expansion was 58% complete, with $623.4 million invested against a $1.2 billion budget; completion was expected in Q2 2018. The Company reported approximately $1,433.5 million of commitments for capital projects.
- Tia Maria remained subject to construction permits amid community opposition and legal challenges. The project budget is approximately $1.4 billion, with $363.9 million invested through March 31, 2017. Management said a potential impairment, if any, would not be material, but timing and permitting remain uncertain.
- An April 2017 stoppage by two Peruvian unions was declared illegal and ended April 22. Management reported a production decrease of 1,418 tons of copper and said operations had normalized.
- The Company reversed $10.2 million of Sonora River remediation provision after Mexican authorities closed their remediation proceedings and the related trust was closed. Biological monitoring was to continue through the first half of 2019; numerous related civil and constitutional lawsuits remained pending. Management considered them without merit and not expected to have a material financial effect.
- Other exposures include a Peruvian soil-contamination matter for which the potential loss could not yet be estimated; pending Tia Maria, labor-share and other litigation; and ongoing strikes at the San Martin and Taxco mines. Management reported non-material impairment of assets at the two struck mines.
- Metal prices are a central earnings risk. Management estimated that, for the remaining nine months of 2017 and assuming production, sales and tax assumptions hold, a $0.10/lb copper price change would affect SCC net earnings by about $85.6 million. Foreign exchange, energy and fuel costs, ore grades, labor, permits, environmental obligations and operating conditions are also risks.
Most important facts for investors to verify
- Whether copper prices and by-product prices sustain the uplift that drove the quarter’s higher sales and margins, and how lower mined copper output develops.
- Progress, cost and schedule for Toquepala and other capital projects, including whether 2017 production targets and the 2018 ramp-up remain achievable.
- Tia Maria permitting, community acceptance, litigation and the potential effects of delay on investment plans.
- Cash generation relative to capital spending, dividends and approximately $5.95 billion of long-term debt.
- Developments in environmental and other litigation, including remaining Sonora River claims and the Peruvian soil-contamination assessment.
- Related-party dealings and commitments: Grupo Mexico affiliates accounted for $116.4 million of purchases and $66.6 million of sales in the quarter.
The independent accountant’s interim review stated that it was not aware of material modifications needed for the financial statements to conform with U.S. GAAP; this was a review, not an audit. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.