Southern Copper Corporation (SCCO) — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Unaudited interim results; the independent accountant performed a review, not an audit. SCC is an integrated copper and by-product producer operating primarily in Peru and Mexico, and is majority-owned indirectly by Grupo Mexico.
Financial and operating performance
- Third quarter: Net sales were $2.157 billion, down 19.5% year over year. Operating income was $787.2 million, down 47.8%; net income attributable to SCC was $519.0 million, down 40.2%; diluted EPS was $0.67 versus $1.12. Operating margin was approximately 36.5%, compared with 56.2% a year earlier.
- First nine months: Net sales were $7.228 billion, down 10.9%. Operating income was $3.066 billion, down 32.4%; SCC-attributable net income was $1.736 billion, down 32.3%; diluted EPS was $2.25 versus $3.32. Operating margin was approximately 42.4%, compared with 55.9%.
- Cash flow and investment: Nine-month operating cash flow was $1.721 billion, down 43.9%. Capital expenditures were $657.6 million, versus $695.5 million. Cash flow from operations less capital expenditures was approximately $1.063 billion. Dividends paid were $2.319 billion, exceeding operating cash flow.
- Liquidity and debt at September 30: Cash and cash equivalents were $2.185 billion; short-term investments were $0.3 million, compared with $486.9 million at year-end 2021. Current assets were $4.959 billion and current liabilities $1.485 billion, a current ratio of approximately 3.3. Debt carrying value was $6.550 billion, including $300.0 million current; cash less debt implies net debt of approximately $4.366 billion. Lease liabilities totaled $869.7 million.
- Margins and costs: SCC-attributable net income was approximately 24.1% of sales in Q3, versus 32.4% in Q3 2021. The company’s non-GAAP copper cash cost rose to $2.06 per pound before by-product credits and $1.03 net of credits in Q3, up 27.2% and 77.9%, respectively.
- Production: Q3 mined copper production fell 6.0% to 508.2 million pounds; nine-month output fell 9.3% to 1,440.6 million pounds. Nine-month molybdenum, silver and zinc production declined 12.5%, 5.8% and 11.3%, respectively.
Changes versus comparable periods
- Lower metal prices and higher operating costs pressured earnings. Q3 average LME copper was $3.51/lb, down 17.4%; molybdenum and silver prices fell 13.2% and 21.3%. Nine-month copper sales volume declined 9.2%.
- Operating costs and expenses increased 16.8% in Q3 and 16.4% for the first nine months. Management cited higher fuel, power, explosives, operating materials and foreign-currency effects, alongside lower production volumes.
- Nine-month operating cash flow was also affected by working capital: accounts payable and accrued liabilities declined $768.6 million, while other operating assets and liabilities used $248.0 million. Cash declined from $3.002 billion at year-end 2021; cash plus short-term investments fell from $3.489 billion to $2.185 billion.
- Q3 other income included a $28.5 million adjustment for excess freight and purchase-cost provisions. Nine-month other income also included a $20.3 million insurance recovery related to the Carla Lacey case. Peruvian tax matters increased tax expense by approximately $58 million during the first nine months.
Outlook, projects and key risks
- Management expected 2022 copper production of approximately 900,000 tonnes, about 3% below its plan, and 2023 production of 926,100 tonnes, supported by recovery in Peru and projects including Pilares and Buenavista Zinc. These are forecasts, not guarantees. Management also forecast 2022 molybdenum production of 25,400 tonnes, silver production of 18.9 million ounces and zinc production of 63,300 tonnes.
- Cuajone operations resumed after a 2022 community blockade disrupted rail access and water supply. Management estimated Peruvian operations would reach 94% of the 2022 production plan; renewed community action remains a risk. The company reported Cuajone and its related facilities operating at full capacity at the time of filing.
- Management attributed cost pressure partly to energy, fuel, explosives and other input costs associated with the Russia-Ukraine war and wider supply-chain constraints. It reported no current impact to its sales program, but warned transportation delays or shortages could affect operations and projects.
- Major projects included Buenavista Zinc, 83% complete with operations expected in the second half of 2023; Pilares, 95% complete and beginning operations; and El Pilar, targeted for production in 2024. Tia Maria had a $1.4 billion budget and $333.7 million invested, but faces multiple pending lawsuits and social and permitting-related uncertainties. The company said it could not reasonably estimate contingencies in several Tia Maria cases.
- Other exposures include pending litigation related to the 2014 Buenavista spill, the Guaymas sulfuric-acid terminal closure and fines, and long-running labor disputes at the San Martin and Taxco mines. The company said the Taxco mine is expected to remain suspended until labor issues are resolved. Peruvian rules requiring additional mine-closure guarantees may also have financial effects that the company could not yet estimate.
- Asset retirement obligations increased to $620.8 million from $562.9 million at year-end, including a $43.3 million estimate increase for Mexican operations. SCC had approximately $434.8 million of committed capital-project spending at quarter-end. Management stated capital plans may be adjusted to economic and market conditions.
- The board declared a subsequent dividend of $0.50 per share, payable November 23, 2022. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether copper prices, by-product prices and production volumes recover sufficiently to offset rising unit costs and lower operating cash flow.
- Progress against production forecasts, particularly Peru’s recovery and the 2023 contribution expected from Pilares and Buenavista Zinc.
- Project schedules, remaining funding needs and the legal, social and permitting status of Tia Maria and other development projects.
- Resolution and potential financial impact of tax matters, community-related disruptions, environmental proceedings and labor disputes; several contingencies are not reasonably estimable in the filing.
- Liquidity after substantial dividends, the decline in cash and short-term investments, debt maturities and the company’s planned capital spending.
- Reported non-GAAP cash-cost measures and one-time items in other income; these should be assessed alongside GAAP results and cash flows.