01—Abstract
Summary
Summary of the 10-K/A filed March 28, 2006. Cited figures are marked; the original filing is the authoritative source.
Southern Copper Corporation (SCCO) filed this Form 10-K/A (Amendment No. 1) for fiscal 2005 to correct typographical and computational errors in its original 10-K filed March 13, 2006.
The amendment re-files the full report, but the corrections are mostly minor (drill-hole spacing, capex and dividend figures, a note on a customer's receivable share, and a share count). The company's financial results are unchanged by the amendment. The headline story is transformational: the April 1, 2005 acquisition of Minera Mexico from Grupo Mexico's Americas Mining Corporation, which lifted annual copper output by roughly 81%a and increased reserves by about 107%, and turned SCC into a three-segment (Peru, Mexican open-pit, Mexican IMMSA underground) producer of copper, molybdenum, zinc and silver.
Financially, 2005 was a record year. Net sales rose 32.8% to $4.11 billionb and net earnings rose 42.5% to $1.40 billion ($9.51 per share), driven by higher copper prices (about 30%) and a 94.7% jump in molybdenum prices, which made molybdenum a major earnings driver. Operating cash flow reached $1.64 billion, and cash and marketable securities were $876 million.
Dividends paid totaled $5.80c per share in 2005 versus $1.30 in 2004, and a further $2.75 dividend was declared in January 2006. Grupo Mexico controls about 75.1% of the stock, so minority investors face governance and related-party concerns.
Key risks for investors include a January 1, 2006 accounting change (EITF 04-06) that reversed $499.5 milliond of capitalized stripping and leach inventory costs and produced a $322.9 million after-tax charge to retained earnings, which will weigh on future operating costs. Other risks include a fatal gas explosion at the Pasta de Conchos coal mine in Mexico in February 2006 (65 miners trapped and presumed dead), Peruvian royalty and Mexican profit-sharing cost increases, Peru's 2006 presidential election, the Asarco bankruptcy and its links to the parent group, and ongoing labor disputes.
02—Key points
Key Highlights
- Record 2005 results: net sales of $4,112.6 million (up 32.8%) and net earnings of $1,400.1 million (up 42.5%), or $9.51 per share.
- Minera Mexico acquisition (April 1, 2005) increased copper reserves by about 107% and annual copper production by about 81%, making SCC a three-segment producer across Peru and Mexico.
- Molybdenum was a major profit driver, with average prices up 94.7% to $31.05/lb; byproduct sales rose 39.1% to $1,373.6 million (33.4% of net sales).
- Operating cash flow of $1,644.2 million; cash and marketable securities of $876.0 million; total debt reduced to $1,172.1 million.
- Dividends of $5.80 per share were paid in 2005 (versus $1.30 in 2004), and a $2.75 per share dividend was declared on January 26, 2006.
- Accounting change effective January 1, 2006 (EITF 04-06) reversed $499.5 million of capitalized stripping costs, a $322.9 million after-tax charge to retained earnings, and will raise future operating costs.
- Grupo Mexico owns about 75.1% of the stock, creating control and related-party risks; the Asarco bankruptcy and the February 2006 Pasta de Conchos mine disaster (65 miners lost) are notable overhangs.
03—Questions
Frequently Asked Questions
What did this 10-K/A change compared with the original filing?
The amendment corrects several typographical and computational errors, such as drill-hole spacing figures, certain capital expenditure and dividend amounts, the aggregate of the 7.5% 2035 notes, a 2003 additional paid-in capital balance, foreign exchange gains and losses, one customer's share of receivables (corrected to 14.6%), and the number of Directors' Stock Award Plan shares awarded (31,200). The company states that the amendment does not change previously reported financial results or disclose events after the original filing date.
Why did SCC's results jump so much in 2005?
Results were driven by higher metal prices (copper up about 30%, molybdenum up 94.7%) and higher sales volumes from the Minera Mexico acquisition, which was consolidated as of April 1, 2005 on a combined basis. Net sales grew $1,015.9 million, while operating income rose 41% to $2,094.5 million. Higher costs, including workers' participation (up $125.6 million) and Peruvian royalty charges, partly offset the gains.
What is the main accounting risk going forward?
Starting January 1, 2006, the company adopted EITF 04-06, which treats production-phase stripping costs as period operating costs rather than deferrable assets. This reversed $499.5 million of net capitalized stripping and leach inventory costs and created a $322.9 million after-tax charge to retained earnings. Management expects operating costs to rise in 2006 and beyond, which will reduce reported operating income relative to the prior deferral method.
What are the main governance and concentration risks for minority shareholders?
Grupo Mexico controls about 75.1% of the stock and can determine board composition, dividend policy, asset sales and debt levels. Several officers and directors also hold positions at Grupo Mexico, and related-party transactions (including freight, construction and management fees of $13.8 million) are material. Minera Mexico's ability to pay dividends to SCC is also constrained by Mexican law, and the company has a Delaware derivative lawsuit pending over the acquisition.
What operational and legal events should investors monitor?
Investors should monitor the aftermath of the February 19, 2006 gas explosion at the Pasta de Conchos coal mine in Mexico, which trapped 65 miners who are now presumed dead, along with the Asarco Chapter 11 proceedings and related asbestos and fraudulent-conveyance claims against the parent group. Peruvian presidential elections in 2006 could change royalty and tax policy, and the Ilo smelter modernization ($500 million budget, completion targeted for end-2006) is a key execution item.
04—Continue