What drove the large increase in SCCO's 2006 earnings?

Metal prices were the main driver. Copper prices rose about 83% and zinc about 136%, lifting net sales 33.5% to $5.46 billion. Operating income grew to $3.05 billion, and net earnings rose 45.5% to $2.04 billion, despite higher costs for purchased copper, workers' profit sharing, and Peruvian royalties.

How did the Mexican strikes and the Pasta de Conchos accident affect production?

Strikes at La Caridad (125 days) and Cananea (47 days) cut Mexican open-pit production sharply, and total mine copper output fell 12.2% to 1,335 million pounds. The February 2006 explosion at Pasta de Conchos killed 65 miners, and the underground coal mine has been closed while recovery efforts continue. Management says both open-pit operations were back to normal capacity by the end of 2006.

What dividend can shareholders expect, and what is the policy?

Dividends paid in 2006 totaled $5.13 per share, including special payments. On January 25, 2007, the board declared a $1.70 per share dividend payable March 2, 2007. The company has paid out a significant share of net income since 1996, although the amount depends on board discretion, capex needs, debt covenants, and the controlling shareholder's preferences.

Who controls Southern Copper, and what are the risks of that control?

Grupo Mexico indirectly owns about 75.1% of the stock and controls board decisions, dividends, asset sales, and debt levels. Several executives also hold roles at Grupo Mexico, which creates potential conflicts of interest in related-party dealings. Minority shareholders also face litigation risk because the parent is involved in Asarco's Chapter 11 bankruptcy and related fraudulent-conveyance claims.

What are the main long-term risks for investors?

Key risks include copper and molybdenum price volatility; reserve estimate uncertainty and slope stability issues in deepening open pits; labor unrest in Peru and Mexico; Peruvian political instability and the 1–3% royalty charge, which may apply to SX/EW output; currency and inflation exposure to the nuevo sol and peso; and rising energy costs, with fuel, gas, and power making up about 42% of production costs.

SCCO 10-K FY2006 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 1, 2007. Cited figures are marked; the original filing is the authoritative source.

Southern Copper Corporation (SCCO) reported a record 2006 fiscal year, with net sales rising 33.5% to $5,460.2 million^a and net earnings up 45.5% to $2,037.6 million (diluted EPS of $6.92, after a two-for-one split in October 2006).

The surge was driven by sharp increases in metal prices: copper rose roughly 83% on average (LME averaged $3.05^b/lb versus $1.67 in 2005), zinc rose about 136%, and silver rose about 58%. Molybdenum prices fell about 21.5% from their 2005 peak, though it remained a major byproduct contributor. Operating margin expanded to 55.9% from 50.6%, reflecting high realized prices against a cash cost base that rose as purchased copper, workers' profit sharing, and Peruvian royalties increased.

Volumes were weaker. Total mine copper output fell 12.2%^c to 1,335 million pounds, largely because of prolonged strikes at the La Caridad (125 days) and Cananea (47 days) mines in Mexico, and the Pasta de Conchos underground coal mine was closed after a February 2006 explosion that killed 65 workers. Management also announced a large increase in Peruvian ore reserves (Toquepala reserves up 83%, extending mine life 23 years), which partly offsets longer-term production concerns.

Capital expenditures were $455.8 million^d, mainly for the Ilo smelter modernization, which was completed in January 2007, and the Cananea SX/EW III plant. Cash from operations reached $2.06 billion, and cash and marketable securities totaled $1.30 billion. Total debt rose to about $1.55 billion after a $400 million notes issuance in May 2006.

For investors, the key considerations are the company's heavy exposure to commodity prices, its controlling shareholder Grupo Mexico (about 75.1% ownership), and its high payout policy. Dividends paid in 2006 totaled $5.13 per share, and a further $1.70 per share dividend was declared in January 2007. The filing also flags risks including labor disputes in Mexico and Peru, political and currency risk in both countries, Peruvian royalty exposure, Asarco-related litigation involving the parent, and reserve estimate uncertainty.

02—Key points

Key Highlights

Record 2006 net sales of $5.46 billion (+33.5%) and net earnings of $2.04 billion (+45.5%), with diluted EPS of $6.92 after the 2-for-1 stock split.
Copper prices averaged about $3.05/lb on the LME (up ~83%), zinc rose ~136% and silver ~58%, while molybdenum fell ~21.5% from the 2005 peak.
Mine copper production fell 12.2% to 1.335 billion lbs, mainly due to strikes at La Caridad (125 days) and Cananea (47 days) in Mexico.
Peruvian ore reserves rose significantly (Toquepala +83%, Cuajone +8%), extending the Toquepala mine life by about 23 years.
Dividends of $5.13 per share were paid in 2006 (about $1.51 billion total), and a $1.70 per share dividend was declared for March 2007.
Ilo smelter modernization was completed in January 2007, satisfying PAMA environmental obligations, with about $500 million in planned 2007 capex.
Grupo Mexico controls about 75.1% of the company, and the company faces litigation tied to parent-company Asarco, along with significant Peruvian royalty and tax disputes.

03—Questions

Frequently Asked Questions

What drove the large increase in SCCO's 2006 earnings?
Metal prices were the main driver. Copper prices rose about 83% and zinc about 136%, lifting net sales 33.5% to $5.46 billion. Operating income grew to $3.05 billion, and net earnings rose 45.5% to $2.04 billion, despite higher costs for purchased copper, workers' profit sharing, and Peruvian royalties.
How did the Mexican strikes and the Pasta de Conchos accident affect production?
Strikes at La Caridad (125 days) and Cananea (47 days) cut Mexican open-pit production sharply, and total mine copper output fell 12.2% to 1,335 million pounds. The February 2006 explosion at Pasta de Conchos killed 65 miners, and the underground coal mine has been closed while recovery efforts continue. Management says both open-pit operations were back to normal capacity by the end of 2006.
What dividend can shareholders expect, and what is the policy?
Dividends paid in 2006 totaled $5.13 per share, including special payments. On January 25, 2007, the board declared a $1.70 per share dividend payable March 2, 2007. The company has paid out a significant share of net income since 1996, although the amount depends on board discretion, capex needs, debt covenants, and the controlling shareholder's preferences.
Who controls Southern Copper, and what are the risks of that control?
Grupo Mexico indirectly owns about 75.1% of the stock and controls board decisions, dividends, asset sales, and debt levels. Several executives also hold roles at Grupo Mexico, which creates potential conflicts of interest in related-party dealings. Minority shareholders also face litigation risk because the parent is involved in Asarco's Chapter 11 bankruptcy and related fraudulent-conveyance claims.
What are the main long-term risks for investors?
Key risks include copper and molybdenum price volatility; reserve estimate uncertainty and slope stability issues in deepening open pits; labor unrest in Peru and Mexico; Peruvian political instability and the 1–3% royalty charge, which may apply to SX/EW output; currency and inflation exposure to the nuevo sol and peso; and rising energy costs, with fuel, gas, and power making up about 42% of production costs.

04—Continue

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