Southern Copper Corporation — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016; comparative periods are the corresponding 2015 periods. Unaudited U.S. GAAP financial statements. SCC is an integrated copper and other-minerals producer operating mainly in Peru and Mexico.
Financial and operating performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $1,400.7 million | $1,133.6 million | $3,980.8 million | $3,791.3 million |
| Operating income | $362.4 million | $286.9 million | $1,093.7 million | $1,227.0 million |
| Net income attributable to SCC | $197.6 million | $98.4 million | $604.6 million | $675.6 million |
| Diluted earnings per share | $0.26 | $0.12 | $0.78 | $0.85 |
| Operating cash flow | $307.1 million | $261.9 million | $635.9 million | $817.1 million |
| Capital investments | $275.6 million | $316.2 million | $840.5 million | $845.9 million |
- Operating margin was approximately 25.9% in Q3 versus 25.3% a year earlier; for the nine months it was 27.5% versus 32.4%. Net margin attributable to SCC was approximately 14.1% versus 8.7% in Q3 and 15.2% versus 17.8% for the nine months.
- Cash and cash equivalents were $511.5 million at September 30, 2016, up from $274.5 million at December 31, 2015. Short-term investments fell to $100.8 million from $603.5 million. Current assets were $2,549.8 million and current liabilities $935.1 million.
- Long-term debt was $5,953.5 million, broadly unchanged from $5,951.5 million at year-end 2015. The company reported $270.9 million of interest expense for the nine-month period.
- Cash dividends paid were $100.6 million in the first nine months, or $0.13 per share. The board subsequently authorized a $0.05-per-share dividend, payable November 29, 2016.
Changes versus prior comparable periods
- Q3 sales rose 23.6% and SCC-attributable net income rose 100.8%, principally on higher copper and silver sales volumes from the Buenavista expansion, partly offset by lower copper prices.
- For the nine months, sales increased 5.0%, but operating income fell 10.9% and SCC-attributable net income fell 10.5%. Higher volumes were offset by lower metal prices and higher costs, depreciation and interest expense.
- Copper production increased 25.3% for the nine months to 1,482.3 million pounds, led by Buenavista, where production rose 72.7%. Copper sales volume increased 25.2% to 1,460.0 million pounds. Molybdenum production declined 5.2%; zinc and silver production increased 25.1% and 24.3%, respectively.
- Average LME copper price for the nine months was $2.14 per pound, 17.4% below 2015. Operating cash cost, a non-GAAP measure, declined to $1.44 per pound excluding by-product revenues from $1.64; including by-product revenues it declined to $0.95 from $1.07.
- Operating cash flow declined 22.2%, partly reflecting increases in receivables, inventories and other operating assets. Investing cash outflow was lower than in 2015, which included substantial net purchases of short-term investments and the El Pilar acquisition. Financing cash flow shifted from a 2015 inflow—when $2.0 billion of debt was issued—to a $172.0 million outflow in 2016.
Outlook, risks and notable items
- Management estimated 2016 production of 905,600 tons of copper, 22,800 tons of molybdenum, 16.0 million ounces of silver and 86,900 tons of zinc. These are forward-looking estimates, not guarantees.
- Management expected a small copper-market deficit in 2016 and forecast 2.5%–3.0% demand growth in 2017, while noting supply, project-startup and labor uncertainties. Metal prices remain a significant earnings risk; management estimated that a $0.10-per-pound copper-price change would change annual net income attributable to SCC by about $44 million, assuming stated production and other assumptions.
- Major spending projects include the Toquepala concentrator expansion, budgeted at $1.2 billion, and Tia Maria, budgeted at approximately $1.4 billion. Tia Maria’s construction permit remained delayed amid community opposition; $362.8 million had been invested. The Toquepala expansion was expected to be completed in 2018.
- Environmental and legal exposures include the 2014 Buenavista leach-solution spill and related proceedings. SCC reported estimated total spill damages of $136.4 million, including $74.9 million deposited in a remediation trust; lawsuits remained pending, although the company said it did not expect them to materially affect its financial position or results. Certain Peruvian environmental contingencies and labor-share claims could not be reasonably estimated.
- Other ongoing risks include environmental compliance costs, commodity and foreign-exchange volatility, mine grades and operating conditions, permitting, labor disputes, and litigation. San Martin and Taxco mines remained suspended amid prolonged strikes; management recorded a non-material impairment for those assets.
- A restructuring plan concluded in Q3, costing $6.9 million and involving severance for 231 employees. Management said disclosure controls were effective; the interim financial statements received an independent accountant’s review, not an audit.
Important facts for investors to verify
- Whether Buenavista’s production gains and cost improvements continue, and whether the 2016 production estimates are achieved.
- How lower copper prices, by-product prices and provisional sales pricing affect realized revenue and margins.
- Progress, funding and permitting for Toquepala, Tia Maria and other major capital projects.
- Updates on the Buenavista spill remediation and litigation, Peruvian environmental contingencies, and labor-share litigation.
- Debt maturities, interest costs, cash generation and capital allocation, including dividends and any further share repurchases.
- Related-party transactions and the implications of Grupo Mexico’s 88.9% ownership of SCC.