Business context and reporting period
Southern Copper Corporation (SCC) filed this Form 10-K for the fiscal year ended December 31, 2009. SCC is an integrated copper producer with mining, smelting and refining operations in Peru and Mexico, and exploration activities in Chile. Its products include copper, molybdenum, zinc, silver, gold and other materials. Grupo Mexico indirectly owned 80% of SCC at year-end.
This is an annual filing, not a stand-alone fourth-quarter report. The filing reports fourth-quarter 2009 net sales of $1.136 billion and net income attributable to SCC of $363.3 million.
Financial and operating highlights
| Metric | 2009 | 2008 |
|---|---|---|
| Net sales | $3.734 billion | $4.851 billion |
| Operating income | $1.485 billion | $2.202 billion |
| Net income attributable to SCC | $929.4 million | $1.407 billion |
| Diluted earnings per share | $1.09 | $1.60 |
| Gross margin | 42.5% | 48.3% |
| Operating income margin | 39.8% | 45.4% |
| Net margin | 24.9% | 29.0% |
| Cash from operating activities | $963.2 million | $1.728 billion |
| Capital expenditures | $414.8 million | $524.4 million |
| Cash and cash equivalents at year-end | $772.3 million | $716.7 million |
| Total debt, including current portion | $1.280 billion | $1.290 billion |
Year-end current assets were $1.778 billion and current liabilities $602.4 million; the current ratio was 2.95. Net debt to total capitalization was 11.6%, down from 14.5%. Most debt was fixed-rate; $1.256 billion of principal was scheduled after 2014. Debt includes 6.375% notes due 2015, 7.5% notes due 2035, Yankee bonds due 2028 and a Mitsui loan.
Operating cash flow covered capital spending, leaving approximately $548 million before financing flows. Financing activities used $458.0 million, including $376.0 million of dividends, $71.9 million of share repurchases and $10.0 million of debt repayment. Dividends paid were $0.44 per share, versus $1.94 in 2008.
Material changes versus prior periods
- Net sales fell 23.0% and SCC-attributable net income declined 33.9% from 2008. Management attributed the sales decrease principally to lower metal prices; LME copper averaged $2.34 per pound versus $3.16, and molybdenum averaged $10.91 versus $28.42.
- Copper sales volume was nearly flat year over year at 1.118 billion pounds, but copper mined fell 0.7% to 1.070 billion pounds. Cananea produced no copper in 2009 because of the strike; it produced 34 million pounds in 2008.
- By-product production was mixed: molybdenum mined rose 14.0% to 41.2 million pounds, zinc rose 3.3% to 243.5 million pounds, and silver rose 7.2% to 13.2 million ounces. Lower molybdenum prices reduced the by-product credit in management’s cash-cost measure.
- Cost of sales excluding depreciation, amortization and depletion declined 16.4% to $1.824 billion, mainly due to lower fuel and power costs and other production costs. Operating cash cost excluding by-product revenue was 136.0 cents per pound, versus 157.1 cents in 2008; including by-product credits, it was 36.0 cents versus 21.8 cents. This is a company-defined, non-GAAP measure.
- Operating cash flow decreased by $765.2 million. Lower earnings and a $286.1 million working-capital use, notably a $299.6 million increase in receivables, were principal factors.
- Compared with 2007, the decline in 2008 and 2009 production and sales primarily reflects labor stoppages, especially at Cananea, alongside metal-price changes.
Outlook, commentary, risks and unusual items
- Management expected 2010 copper and molybdenum production to match 2009 levels. On January 28, 2010, the Board approved a $2.8 billion 2010–2012 investment program, forecast to add approximately 342,000 tons of annual copper capacity and 6,600 tons of annual molybdenum capacity when completed. The company expected about $800 million of 2010 capital spending, including $600 million in Peru and $200 million in Mexico; these plans may change with market conditions.
- The program includes the Tia Maria project in Peru, budgeted at $934 million and expected to produce about 260 million pounds of copper cathodes annually. SCC had invested $280 million by year-end 2009. Construction was delayed pending environmental approval and a final public hearing; local communities had raised concerns about water use.
- Cananea, Taxco and San Martin had been on strike since July 2007. A February 11, 2010 Mexican labor-court ruling provided a legal basis for termination of Cananea employment relationships; SCC said it expected to regain control but estimated restoration would take months. Taxco and San Martin remained suspended pending resolution. SCC reported a $35.1 million estimated Cananea severance liability and no impairment at Cananea at year-end, though impairment could change with prices or restart timing.
- Other material exposures include commodity-price volatility; energy costs, which management said represented approximately 36% of 2009 production cost; currency and country risks; water availability; reserve-estimation uncertainty; slope stability; environmental and closure obligations; and labor, community and regulatory delays. Mexican operations also face restrictions on subsidiary dividends and debt covenants.
- Year-end asset retirement obligations were $48.9 million on the balance sheet; contractual-obligation disclosures estimated $267.3 million of aggregate closure and remediation costs, primarily long-dated. The filing says Peru-approved closure plans require annual guarantees of $2.6 million over 34 years beginning in 2010.
- Peruvian former-worker labor-share litigation remained unresolved; SCC had not accrued a loss, stating it believed a loss was not probable. A Mexican Geological Services royalty dispute was settled for $19.0 million in installments through 2010. Mexican tax-law changes generated a $22.6 million additional 2009 tax expense; uncertain tax positions were $26.2 million on the balance sheet.
- Provisional pricing adjustments reduced 2009 net sales by $12.1 million, versus $97.3 million in 2008. SCC had 23.4 million pounds of provisionally priced copper and 10.9 million pounds of molybdenum outstanding at year-end; management did not expect final pricing to materially affect results.
- Auditors issued unqualified opinions on the 2009 financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal controls were effective as of December 31, 2009.
Important facts for investors to verify
- Whether Cananea control and production were actually restored, and the eventual production, restart costs and impairment outcome; separately track Taxco and San Martin strike resolutions.
- Progress, permitting, community acceptance, water supply, construction timing and total funding needs for Tia Maria and the broader $2.8 billion expansion plan.
- Realized metal prices, sales volumes, provisional-price settlements and the sensitivity of earnings to metal prices; management estimated 2010 net earnings sensitivity of $5.7 million per $0.01/lb. copper, $22.1 million per $1/lb. molybdenum, $1.3 million per $0.01/lb. zinc and $9.5 million per $1/oz. silver.
- Cash generation and working-capital conversion, including receivables; the ability to fund planned capital spending and dividends while maintaining liquidity and complying with debt covenants.
- Reserve assumptions and revisions, environmental closure guarantees and obligations, the labor-share claims, tax exposures and other litigation or related-party transactions.