Southern Copper Corporation — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; balance-sheet comparisons are to December 31, 2010. Southern Copper mines and sells copper and by-products, with principal operations in Peru and Mexico. Interim financial statements were reviewed by the independent accountant, not audited.
Financial and operating performance
| Metric | Q1 2011 | Q1 2010 / comparison |
|---|---|---|
| Net sales | $1.602 billion | $1.219 billion; up 31.4% |
| Operating income | $762.7 million | $608.8 million |
| Net income attributable to SCC | $478.4 million; $0.56 per share | $383.2 million; $0.45 per share |
| Operating cash flow | $515.1 million | $307.2 million |
| Capital expenditures | $73.0 million | $75.4 million |
| Cash and cash equivalents | $1.973 billion | $2.193 billion at Dec. 31, 2010 |
| Short-term investments | $220.7 million | $76.2 million at Dec. 31, 2010 |
| Debt | $2.755 billion carrying amount, including current portion | $2.760 billion at Dec. 31, 2010 |
| Dividends per share | $0.58 paid | $0.43 in Q1 2010 |
Sales growth reflected higher metal prices and 11.5% more copper sold. Average LME copper price rose 33.5% to $4.38 per pound. Operating cash cost was $0.243 per pound of copper produced, compared with a $0.147-per-pound credit in Q1 2010, mainly because by-product credits were lower; excluding by-product credits, the cash cost increased to $1.666 from $1.504 per pound. Operating income was 47.6% of sales, versus 49.9% in the prior-year quarter; net income attributable to SCC was 29.9% of sales, versus 31.4%.
Net cash used in investing activities was $228.2 million, including $144.6 million for short-term investments and $11.3 million invested in the Tantahuatay development project. Financing used $501.7 million, principally the $493.0 million dividend, and included repayment of $5.3 million of bonds at a $1.4 million premium. Cash declined by $219.4 million during the quarter. Current assets were $3.669 billion and current liabilities $1.065 billion at March 31.
Changes from the prior comparable period
- Net income attributable to SCC increased $95 million, alongside higher sales prices and volume; operating cash flow rose $207.8 million.
- Mined copper production increased 13.7% to 273.8 million pounds, supported by Buenavista. Molybdenum production fell 10.1%, zinc 25.5%, and silver 8.1%.
- Operating costs and expenses increased $228.7 million. Cost of sales rose chiefly because of higher third-party copper purchases in Peru and $22.3 million of Buenavista rehabilitation costs.
- Net interest expense increased $22.8 million, largely reflecting the $1.5 billion of fixed-rate notes issued in April 2010. The effective tax rate declined to 33.1% from 34.5%, partly due to a larger contribution from Mexican earnings.
- The company recognized a $35.8 million realized loss on copper hedges; there was no comparable hedge activity in Q1 2010. Cash-flow hedge losses remained in other comprehensive income until settlement.
Outlook, risks and unusual matters
- Guidance: Management maintained 2011 copper production guidance of 630,000 tons, including third-party purchases. It expected molybdenum production of about 17,000 tons, zinc of 97,100 tons and silver of 13.0 million ounces. Buenavista was restored to full capacity in April; management expected Cuajone’s higher second-half ore grade to offset weaker Q1 production.
- Projects: The approximately $1.0 billion Tia Maria project had $434.7 million invested by quarter-end. Peru suspended the environmental-impact-assessment approval process after protests; timing, additional costs and any potential loss were not estimable. Management said much of the equipment could be redeployed. Other capital plans include expansions at Toquepala, Cuajone and Buenavista; project timing and spending remain subject to review.
- Market and operating risks: Earnings are sensitive to volatile metal prices, ore grades, production, fuel and power costs, foreign exchange, labor relations, permits, weather, equipment, water and geology. Copper hedges covered an estimated 62% of remaining 2011 sales through swaps and collars; collars covered 13% of first-quarter 2012 sales.
- Contingencies: The company disclosed Peruvian former-employee labor-share lawsuits, including an adverse 2009 Supreme Court decision whose enforcement was suspended; it recorded no provision, citing defenses and inability to estimate the contingency. Delaware shareholder litigation related to the proposed 2004 merger was expected to go to trial in June 2011. Tia Maria-related and other legal claims also remain relevant. The company reported no belief that these matters would materially affect its financial position, but outcomes are uncertain.
- Labor and environmental items: Strikes continued at the San Martin and Taxco mines in Mexico; Buenavista had resumed operations after a stoppage that ended in June 2010. A $3.4 million provision remained for disputed severance payments. The San Luis Potosi smelter demolition and remediation program had a $35.7 million budget, with $9.7 million spent by quarter-end. A Mexican environmental-law amendment may make challenges to permits and authorizations easier to bring.
- Other matters: AMC, SCC’s parent, had made a non-binding all-stock combination proposal; an independent committee was evaluating it, with no completion deadline stated. The board later authorized a $0.56-per-share dividend, payable May 18, 2011. A tax-audit-related decrease of approximately $30–$50 million in unrecognized tax benefits was considered reasonably possible within 12 months.
Most important facts for investors to verify
- Whether copper prices, hedge settlements and copper production sustain the reported sales and earnings growth.
- Whether the 630,000-ton copper guidance is achieved, including Buenavista ramp-up and the expected second-half Cuajone grade recovery.
- The status, approval timetable, remaining funding needs and potential impairment or redeployment of Tia Maria assets.
- Cash generation and liquidity after dividends and planned capital investment, and the cost and maturity profile of the debt.
- Developments in labor-share and shareholder litigation, Mexican labor disputes, and environmental or permit challenges.