Southern Copper Corporation — Q1 2013 Form 10-Q
Business context and reporting period
Reports the three months ended March 31, 2013, compared with the same period in 2012. Southern Copper produces copper and related metals, primarily from operations in Peru and Mexico. Interim financial statements are unaudited; the independent accountant performed a review, not an audit.
Financial performance and liquidity
- Revenue: $1.623 billion, down 10.1% from $1.806 billion. Management attributed the decline mainly to lower metal prices and lower copper and zinc sales volumes.
- Profitability: Operating income was $770.1 million, down 20.9%; operating margin was approximately 47.5%, versus 53.9%. Net income attributable to SCC was $495.4 million, down 20.3%; diluted EPS was $0.59, versus $0.73.
- Costs: Operating costs and expenses increased to $853.0 million from $833.0 million. Cash cost per pound of copper, including by-product credits, was $0.914, versus $0.537; excluding those credits, it was $1.989, versus $1.839. The cash-cost measure is non-GAAP.
- Cash flow and investment: Operating cash flow was $594.5 million, down from $720.4 million. Capital expenditures were $316.8 million, up 78.5%; operating cash flow less capital expenditures was approximately $277.7 million. Cash and cash equivalents ended the quarter at $2.462 billion.
- Balance sheet: Current assets were $4.360 billion and current liabilities $921.6 million. Long-term debt was $4.204 billion, plus $10.0 million current portion. Cash plus short-term investments of $204.5 million totaled about $2.667 billion; debt less those balances was approximately $1.547 billion.
- Dividends: The company paid $0.24 per share during the quarter. It subsequently announced a $0.20 per-share dividend, payable May 21, 2013.
Changes versus the prior comparable period
- Average LME copper price declined 4.5% to $3.60 per pound; molybdenum and silver prices fell 20.0% and 8.1%, respectively. Copper production decreased 2.2% to 329.6 million pounds; copper sales fell 4.3% to 344.6 million pounds.
- Lower prices and sales volumes reduced revenue and earnings. Higher production costs, depreciation and interest expense also weighed on results. Interest expense increased by $18.1 million, primarily following the November 2012 issuance of $1.5 billion in secured notes.
- Capital expenditures rose substantially, led by Mexican operations, while operating cash flow declined. Cash remained broadly stable from year-end.
- The effective tax rate fell to 32.5% from 33.9%, mainly due to a one-time discrete net tax benefit in Q1 2013.
Outlook, management commentary and principal risks
- Management maintained 2013 production guidance of 650,000 metric tons of copper, including approximately 3% purchased from third parties; it expected 19,800 metric tons of molybdenum, 16.3 million ounces of silver and 99,100 metric tons of zinc.
- The company aims to raise copper production capacity from approximately 650,000 to 1.2 million metric tons by 2017. Its $2.8 billion Buenavista program is intended to increase annual capacity from 180,000 to 488,000 metric tons by 2015. Project schedules and spending are estimates and subject to approvals and market conditions.
- Tia Maria, a proposed project exceeding $1 billion, remained suspended pending a new environmental impact assessment and government approvals; planned start-up had been rescheduled to 2016. The company reported $495.6 million of spending to date and stated that any impairment, if required, was expected to be immaterial.
- Toquepala expansion approvals were delayed amid community concerns. An agreement commits the company to approximately $100 million for local development projects, contingent on project approval.
- Key exposures include volatile metal prices, operating costs and exchange rates; permitting, water and environmental matters; labor disruptions; and political and legal risks in Peru and Mexico. Management disclosed multiple pending Peruvian labor-share and mining-concession disputes, as well as a tailings-dam property dispute; it made no provision for the labor-share claims because the amount was not reasonably estimable and it believed it had meritorious defenses. Strikes at the San Martin and Taxco mines remained unresolved and those mines were expected to stay suspended.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no material change to the risk factors previously disclosed in the 2012 Form 10-K.
Important facts for investors to verify
- Whether copper and by-product prices, sales volumes and production costs support the stated earnings and production outlook.
- Progress, remaining costs and permitting status for Buenavista, Toquepala and Tia Maria, including the effect of delays or any impairment.
- Resolution and potential financial exposure from the labor-share, mining-concession and tailings-dam disputes, and the status of the San Martin and Taxco labor actions.
- Debt terms and interest costs following the 2012 secured-notes issuance, alongside the company’s substantial capital spending and dividend commitments.
- The impact of the quarter’s one-time tax benefit and the sustainability of cash generation as investment spending increases.