Southern Copper Corporation — Q3 2019 Form 10-Q
Business context and reporting period. Southern Copper is an integrated copper and other-metals producer operating in Peru and Mexico. Grupo Mexico indirectly owned 88.9% of the company. This unaudited quarterly report covers the three and nine months ended September 30, 2019; comparisons are with 2018.
Financial and operating performance
- Revenue: Q3 net sales were $1.860 billion, up 7.9%; nine-month sales were $5.431 billion, up 0.5%. Higher sales volumes—particularly copper—were partly offset by lower copper prices. Copper accounted for 79.9% of nine-month sales.
- Profit: Q3 operating income was $713.8 million, up 2.5%, and net income attributable to SCC was $389.6 million, up 5.5% (EPS $0.50 versus $0.48). For nine months, operating income fell 6.0% to $2.121 billion; SCC-attributable net income fell 5.6% to $1.180 billion (EPS $1.53 versus $1.62).
- Margins: Operating margin was approximately 38.4% in Q3 versus 40.4% a year earlier, and 39.1% for nine months versus 41.8%. SCC-attributable net margin was approximately 21.0% and 21.7%, respectively, versus 21.4% and 23.1%.
- Cash flow and investment: Nine-month operating cash flow was $1.371 billion, down from $1.789 billion. Capital expenditures were $536.1 million versus $831.8 million; operating cash flow less capital expenditures was $834.4 million versus $957.1 million. Working-capital movements reduced 2019 operating cash flow by $440.5 million, including lower payables and accrued liabilities and higher prepaid taxes.
- Liquidity: At September 30, cash and equivalents were $1.935 billion, versus $844.6 million at year-end 2018. Current assets were $4.178 billion and current liabilities $1.432 billion.
- Debt: Debt on the balance sheet totaled approximately $6.940 billion, including $399.7 million current and $6.540 billion long-term. In September, a subsidiary issued $1.0 billion of 4.5% senior notes due 2050; proceeds are intended for expansion, other capital spending and general corporate purposes. The balance sheet also includes $1.062 billion of lease liabilities recognized upon adoption of the new lease standard.
- Dividends: The company paid $1.20 per share in the first nine months, versus $1.00 in 2018. A further $0.40 per-share dividend was authorized for payment in November 2019.
Material changes versus the prior comparable period
- Mine copper production increased 13.7% in the first nine months to 1.626 billion pounds, mainly reflecting the ramp-up of the Toquepala concentrator and improved Buenavista output. Copper sales volume rose 11.3%.
- Nine-month copper prices averaged $2.74 per pound on the LME, down 9.0%. Lower prices, higher operating costs and increased depreciation contributed to lower year-to-date operating income and earnings despite stronger volumes.
- Operating costs and expenses increased 5.3% to $3.310 billion for nine months, including higher depreciation, amortization and depletion and higher costs at Peruvian operations. Cash operating cost per pound, net of by-product revenues, was $0.84, unchanged year over year.
- Cash increased substantially, supported in part by the new bond issuance and net proceeds from short-term investments, while operating cash flow declined and dividends paid rose to $927.7 million.
- Adoption of ASC 842 on January 1, 2019 added approximately $1.116 billion of right-of-use assets and lease obligations at adoption. The filing says adoption materially affected the balance sheet but did not materially affect earnings or cash flows.
Outlook, commentary, risks and unusual items
- Management expected 2019 copper production of 991,000 tons, 12% above 2018, with higher expected silver, zinc and molybdenum production. It described a longer-term plan to increase copper production to 1.5 million tons by 2026. These are expectations, not guaranteed outcomes.
- Management cited trade tensions and a slowing global economy as risks to copper demand and prices, and lowered its estimate of 2019 refined-copper demand growth to 0.9%. It estimated that a $0.10-per-pound copper price change would affect remaining-2019 net income by about $32.4 million, assuming stated production, sales and tax assumptions and excluding hedging.
- Tia Maria: The $1.4 billion Peru project’s construction permit was temporarily suspended in August 2019 following complaints and local opposition. A Mining Council hearing occurred October 7. Management expected a favorable decision but said construction would be delayed until dialogue and greater community support were established. The project’s timing and investment remain uncertain.
- Other contingencies: Environmental remediation costs for Peruvian sites could not yet be reasonably estimated. The filing also describes pending Tia Maria and other litigation, including 45 civil cases related to the 2014 Buenavista spill; management said those spill proceedings were not expected to materially affect financial position or results. The Guaymas terminal had a partial temporary shutdown affecting sulfuric-acid storage and transport; management expected no operational impact. These matters remain subject to developments.
- Labor and operations: San Martin mine rehabilitation was in progress, with $70.2 million spent against an $87 million budget. Taxco remained suspended amid a long-running strike. The company also increased its asset-retirement obligation by $25.2 million through September, largely reflecting estimate changes.
- Unusual items: Nine-month other income included a $25 million insurance payment related to rain damage in Peru. The IRS settled its examination of 2011–2013 tax years, reducing unrecognized tax benefits from $214.5 million at 2018 year-end to $69.5 million; the filing says the resulting tax benefit was immaterial.
- Management identified commodity prices, costs for fuel and electricity, permits, weather, ore grades, labor, litigation, environmental matters and political/economic conditions in foreign operations among risks to forward-looking results. The auditor performed an interim review, not a full audit; management reported disclosure controls were effective.
Important facts for investors to verify
- Whether copper prices, production volumes and by-product credits sustain margins and cash generation.
- Progress and final cost/timing of growth projects, particularly Tia Maria and the Buenavista Zinc, Pilares and El Pilar projects.
- Debt repayment capacity, including the long-dated notes, current maturities, lease obligations and continued dividend payments.
- Developments in Tia Maria permitting and community opposition, environmental remediation estimates, Guaymas restrictions and pending litigation.
- Whether working-capital outflows and higher operating costs persist, and the effect of related-party transactions with Grupo Mexico affiliates.