Southern Copper Corporation — Q1 2022 Form 10-Q
Business context and period: Southern Copper is an integrated copper and other-minerals producer operating primarily in Peru and Mexico. This unaudited quarterly report covers the three months ended March 31, 2022; comparisons are with Q1 2021 unless otherwise noted. Amounts below are in U.S. dollars, in millions except per-share and production data.
Financial and operating performance
- Revenue: Net sales were $2,763.8, up 9.1% from $2,532.5. Copper accounted for 78.0% of sales; molybdenum 10.0%, silver 3.8%, zinc 3.6%, and other products 4.6%.
- Profit and margins: Operating income was $1,470.1, up 8.8%; operating margin was approximately 53.2%, versus 53.4%. Net income attributable to SCC was $784.7, up 2.7%, and diluted EPS was $1.02 versus $0.99.
- Costs and taxes: Operating costs and expenses increased 9.6% to $1,293.7. The effective tax rate rose to 43.8% from 40.1%, primarily reflecting uncertain tax provisions in Peru; the company recorded approximately $33.8 of additional tax expense for uncertain Peruvian positions.
- Cash flow and investment: Operating cash flow was $820.7 versus $782.6. Capital expenditures were $205.2 versus $232.6. Cash dividends paid were $773.1, compared with $463.8; cash and cash equivalents fell to $2,847.2 from $3,002.0, including a $75.8 adverse effect from exchange-rate changes.
- Liquidity and debt: Current assets were $5,768.5 and current liabilities $1,725.8, implying a current ratio of approximately 3.3. Debt, including current maturities, was approximately $6,548.5; cash plus short-term investments totaled $3,253.7. Lease liabilities were $900.8. Total equity was $8,220.6.
- Operating costs per copper pound: The company’s non-GAAP cash cost was $1.83 before by-product credits and $0.55 net of by-product revenues, compared with $1.51 and $0.74, respectively, in Q1 2021. Higher by-product revenues more than offset higher pre-credit costs on the net measure.
Material changes versus Q1 2021
- Higher copper, molybdenum, and zinc prices supported sales growth; average LME copper was $4.53/lb, up 17.7%, and molybdenum averaged $18.99/lb, up 69.7%.
- Copper sales volume fell 13.4% to 458.4 million pounds. Mined copper production declined 10.0% to 472.8 million pounds, with lower output at Cuajone, Toquepala, La Caridad, and IMMSA; Buenavista production increased.
- Operating expenses rose $112.8, driven mainly by higher other production costs, including fuel and currency effects, and higher costs of metals purchased from third parties.
- Income taxes increased $104.6, while attributable net income increased only $20.9, reflecting the higher tax burden and lower equity earnings from affiliates.
- Cuajone’s interruption reduced Q1 sales by an estimated $117 and added $7.9 of unabsorbed fixed costs. The company estimated lost production of 12,869 tonnes of copper content and 296 tonnes of molybdenum.
Outlook, commentary, and risks
- Production outlook: Management expected 2022 copper production of 895,800 tonnes, down 6.5% from 2021, and molybdenum production of 25,300 tonnes, down 16.4%. It forecast copper production of 971,200 tonnes in 2023. These are forward-looking estimates, not guarantees.
- Cuajone: Operations were closed at quarter-end following community protests and blockades. After the quarter, the facilities and railway were returned on April 21, 2022; the filing reports the mine and related facilities were operating at full capacity. A government-facilitated dialogue process was planned. Recurrence could disrupt operations and results.
- Commodity and external risks: Results remain sensitive to volatile metal prices, ore grades and recoveries, local currencies, fuel and energy costs, and shipping delays or shortages. Management said Russia’s invasion of Ukraine and related supply and energy disruptions had not materially affected results through March 31, 2022, but it was monitoring impacts.
- Projects and capital: Q1 capital investment was $205.2, and approximately $369.2 was committed to capital projects at quarter-end. Management cited Pilares production expected in late 2022 and Buenavista Zinc operations expected in the second half of 2023. Tia Maria remains subject to social and legal challenges; approximately $332.3 had been invested in the project by quarter-end.
- Contingencies and unusual items: The Cuajone protesters sought $5.0 billion plus a continuing 5% of net profits. The company said Q1 financial impact was not material, but prolonged or renewed disruption could have greater effects. Other notable matters include unresolved Tia Maria and Buenavista spill-related litigation, with potential exposure not reasonably estimable for some cases; a $43.3 increase in the Mexican asset-retirement obligation following an estimate review; and a $33.8 tax expense from uncertain Peruvian tax positions.
- Capital returns: The company paid $1.00 per share in March. On April 28, the board authorized a $1.25-per-share dividend payable May 31, 2022.
- Financial reporting: The independent accountant’s interim review reported no material modifications needed for GAAP conformity; this was a review, not an audit. Management concluded disclosure controls were effective as of March 31, 2022.
Important facts for investors to verify
- Whether Cuajone remains at full capacity and whether the community dialogue prevents further interruptions.
- Actual 2022 production, ore grades and recoveries versus management’s forecasts, especially in Peru.
- How much of sales and cash generation depends on elevated metal prices and by-product credits; monitor cash costs before and after those credits.
- Resolution and potential financial effects of the Peruvian tax positions and material litigation or community claims.
- Capital spending, project timing and funding needs, particularly for Tia Maria, Pilares, and Buenavista Zinc.
- Cash and liquidity after the large dividend, alongside debt maturities, lease obligations, and future shareholder distributions.