01—Abstract
Summary
Summary of the 10-K filed February 29, 2008. Cited figures are marked; the original filing is the authoritative source.
Southern Copper Corporation (SCCO) reported record results for fiscal 2007, with net sales of $6,085.7 milliona (up 11.5% from 2006) and net earnings of $2,216.4 million (up 8.8%), both the highest in the company's history.
Growth was driven by higher average prices for copper (up 4.2% to 5.9%), molybdenum (up 22.7%) and silver (up 16%), along with a 40.2% rise in molybdenum sales volume. Operating income reached $3,497.4 millionb, and diluted EPS was $7.53. Cash provided by operations was $2,703.5 million, and year-end cash was $1,409.3 million.
The key risk is the Mexican labor situation. Strikes at Cananea, Taxco and San Martin beginning in July 2007 cost the company an estimated 178.4 million pounds of copper, 25.6 million pounds of zinc and $487.5 millionc of operating income. A Mexican federal court declared the Cananea strike illegal in January 2008, and the company expects about three months to return Cananea to full production, with an appeal pending.
Taxco is on standby and San Martin depends on litigation. Management also approved a roughly $2.1 billiond investment program focused on Peru (Tia Maria, concentrator and smelter expansions), targeting 270,000 additional tons of annual copper output by 2011, while Mexican growth projects were put on hold. Capital return is also substantial.
Dividends paid in 2007 totaled $6.80 per share (about $2.0 billion), and the Board declared a $1.40 dividend payable February 29, 2008. A new share repurchase program of up to $300 million was authorized. Grupo Mexico controls about 75.1% of the stock, which creates governance and related-party considerations for minority investors.
02—Key points
Key Highlights
- Record 2007 net sales of $6,085.7M (+11.5%) and net earnings of $2,216.4M (+8.8%); diluted EPS of $7.53 versus $6.92 in 2006.
- Operating income of $3,497.4M with a 57.5% operating margin; molybdenum now contributes about 17.8% of net sales, and total by-product sales rose 41.4% to $1,856.9M.
- Mexican strikes at Cananea, Taxco and San Martin cost an estimated 178.4M lbs of copper and $487.5M of operating income in 2007; Cananea is expected to take about three months to return to full production.
- Capital program re-prioritized to Peru: a $2,108M investment in Tia Maria, Toquepala and Cuajone concentrator expansions, and Ilo smelter/refinery expansion, adding 270,000 tons of annual copper by 2011; $2,256M of Mexican projects put on hold.
- Shareholder returns: $6.80 per share dividends paid in 2007 (about $2.0B), a $1.40 dividend declared for February 2008, and an up to $300M share repurchase program authorized January 29, 2008.
- Balance sheet: cash of $1,409.3M, long-term debt of $1,449.8M, net debt to total capitalization of 1.0%, and stockholders' equity of $3,848.1M.
- Controlling shareholder Grupo Mexico owns about 75.1%; related-party transactions and the Asarco litigation create governance and contingent-liability considerations.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2007filed February 29, 2008Financial Statements
| Cost of Revenue | $2.12B |
| SG&A Expenses | $98.05M |
| Operating Expenses | $2.59B |
| Operating Income | $3.50B |
| Net Income | $2.22B |
| EPS (Basic) | $2.51 |
| EPS (Diluted) | $2.51 |
| Shares Outstanding (Basic) | 883.39M |
| Shares Outstanding (Diluted) | 883.39M |
05—Questions
Frequently Asked Questions
Why did earnings grow in 2007 despite the Mexican strikes?
Higher average metal prices drove the gain: copper rose 4.2% to 5.9%, molybdenum 22.7%, and silver 16%. Molybdenum volume also increased 40.2% as Peruvian grades improved and La Caridad recovered from its 2006 strike. Those gains offset the lost copper and zinc volume from the Mexican strikes, and 2007 also benefited from a $10.9M copper derivative gain versus a $276.1M loss in 2006.
How much dividend can investors expect, and is it sustainable?
The company paid $6.80 per share in 2007, which exceeds 2007 diluted EPS of $7.53 only modestly on a payout basis, and it declared $1.40 for February 2008. Management says the dividend policy is reviewed by the board in light of the intensive capital program and expected cash flow. The company has historically distributed a large share of net income, so payouts are likely to remain high but are discretionary and subject to the capex program and debt covenants.
What are the main risks from the Mexican labor disputes?
The Cananea strike was declared illegal by a labor court in January 2008, but a federal judge upheld the union's position on February 14, 2008, and the company will appeal. Taxco is on standby, and San Martin's restart depends on litigation. Labor disruption has recurred in Mexico (2006 and 2007), and the company cannot assure against future strikes. Lost production and higher labor costs could materially affect 2008 results.
What is the growth outlook and how is capital being deployed?
Capital expenditures were $315.7M in 2007 and about $530M is planned for 2008. The priority program is about $2.1 billion in Peru (Tia Maria SX/EW, Toquepala and Cuajone concentrator expansions, and the Ilo smelter and refinery expansion), targeting 270,000 additional tons of annual copper production by 2011. Mexican projects, including Cananea expansions and a Guaymas smelter, were temporarily put on hold because of the labor situation.
Are there material legal or structural risks for minority shareholders?
Grupo Mexico controls about 75.1% of the stock and can determine the outcome of most stockholder votes, including dividends and debt levels. Certain officers and directors also hold Grupo Mexico positions, and related-party transactions occur regularly. Legal matters include a Delaware derivative suit over the 2005 Minera Mexico acquisition, labor-share litigation in Peru, the Asarco-related fraudulent conveyance claims involving the parent, and the 2006 Pasta de Conchos mine disaster. Management believes none of these will have a material adverse effect, but some are unresolved.
06—Continue