Southern Copper Corporation — Q1 2012 Form 10-Q
Business context and reporting period
Southern Copper mines and sells copper and by-products, with principal operations in Peru and Mexico. This unaudited report covers the three months ended March 31, 2012, compared with Q1 2011. The interim financial statements received an independent accountant’s review, not an audit.
Key financial and operating metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $1,805.9 million | $1,602.0 million | +12.7% |
| Operating income | $972.9 million | $762.7 million | +27.6% |
| Net income attributable to SCC | $621.4 million | $478.4 million | +29.9% |
| EPS, basic and diluted | $0.73 | $0.56 | +$0.17 |
| Operating cash flow | $720.4 million | $515.1 million | +$205.3 million |
| Capital expenditures | $177.4 million | $73.0 million | +$104.4 million |
- Operating margin was approximately 53.9%, versus 47.6% in Q1 2011; SCC-attributable net margin was approximately 34.4%, versus 29.9%.
- At March 31, cash and cash equivalents were $1,518.2 million and short-term investments were $227.3 million. Current assets were $3,406.6 million and current liabilities $958.0 million; the derived current ratio was approximately 3.6.
- Total debt was approximately $2,745.9 million, largely long-term, versus $2,745.7 million at year-end. Cash and short-term investments exceeded current debt; net debt after those balances was approximately $1.0 billion. Long-term debt fair value was reported above carrying value: $3,128.2 million versus $2,745.9 million.
- Cash increased by $670.1 million during the quarter. Financing cash outflow was $160.1 million, including $159.8 million of cash dividends.
- Copper mined production rose 23% to 337 million pounds; molybdenum rose 8% to 10.2 million pounds, zinc rose 13% to 50 million pounds, and silver rose 17% to 3.4 million ounces. Copper sales volume increased 25.5% to 360 million pounds.
- The average LME copper price fell 13.9% to $3.77 per pound; molybdenum and zinc prices fell 17.9% and 15.6%. Silver rose 3% to $32.69 per ounce.
Changes versus the prior period
Higher production and sales volumes—especially the recovery of Buenavista to full production after its prolonged strike—more than offset weaker copper and other metal prices. Sales increased while operating costs declined modestly. Operating cash flow improved, aided by a $24.9 million working-capital benefit, compared with a working-capital use in Q1 2011. Capital spending increased substantially as expansion work advanced.
Operating cash cost per pound of copper, including by-product credits, increased to $0.52 from $0.35; excluding by-product credits, it rose to $1.82 from $1.77. Management attributed the increase to lower by-product price credits and higher power, fuel, repair, and materials costs. The effective tax rate rose to 33.9% from 33.1%, principally reflecting Peru’s new special mining tax; SCC accrued $11.9 million for that tax.
Outlook, commentary, risks, and unusual items
- Management maintained 2012 copper production guidance of 640,000 tons, including 5% purchased from third parties; it expected about 17,200 tons of molybdenum and zinc and silver production around 2011 levels. These are forward-looking estimates, not assurances.
- Management cited European recession and debt concerns as risks to metals demand, while expecting a tight copper market and estimated 2012 refined-copper demand growth of 2.6%. Metal prices, supply, operating costs, permits, labor, weather, ore grades, and foreign-exchange movements remain important uncertainties.
- Tia Maria, a planned investment exceeding $1 billion, remained suspended following protests and government action. SCC was preparing a new environmental impact study and rescheduled project start-up to 2015. Spending through March 31 was $401.1 million; management said any impairment, if incurred, would not be material.
- A Delaware court judgment in the shareholder derivative case related to the 2005 Minera Mexico transaction found AMC defendants jointly and severally liable for $1,347 million plus $684.6 million pre-judgment interest and accruing post-judgment interest. SCC separately faces $304.7 million in attorneys’ fees and expenses, payable from the award rather than existing SCC cash. The defendants and SCC appealed in January 2012. SCC said it did not believe the litigation outcome would materially adversely affect its financial position or results, but the appeal and potential resolution are significant items to monitor.
- Other contingencies include Peruvian former-employee claims for historical labor shares and dividends, for which SCC recorded no provision because it asserts defenses and says the amount cannot be reasonably estimated; appeals in other Tia Maria-related title cases; and labor disputes at the San Martin and Taxco mines. Resolution of relevant appeals remained pending.
- Tax authorities’ examinations could result in an estimated $30–$50 million increase in unrecognized tax benefits over the next 12 months. Environmental remediation at the closed San Luis Potosi smelter has a $35.7 million budget; $25.4 million had been spent, with completion expected by the end of 2013.
- On February 28, SCC paid a $0.54-per-share dividend, comprising $0.19 cash and a stock dividend valued at $0.35 per share. On April 23, the board authorized a $0.53-per-share cash dividend payable May 24, 2012.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no material change in contractual obligations or risk factors from the 2011 Form 10-K.
Important facts for investors to verify
- Progress and potential financial consequences of the appealed Delaware judgment, including interest accrual and the treatment of the attorneys’ fee award.
- Whether Tia Maria can obtain environmental approval and meet the revised 2015 start-up target, and whether delay changes project costs or asset values.
- Delivery against 2012 production guidance and the assumptions behind the expected copper-market balance and metal prices.
- Expansion-project budgets, schedules, and funding needs, particularly Buenavista, Toquepala, and Cuajone, given the sharp rise in quarterly capital expenditures.
- Developments in labor claims and mine strikes, environmental matters, and the possible increase in unrecognized tax benefits.
- Debt maturity, interest-rate exposure, and the sustainability of cash dividends alongside the company’s expansion program.