01—Abstract
Summary
Summary of the 10-K filed March 2, 2009. Cited figures are marked; the original filing is the authoritative source.
Southern Copper Corporation (SCCO) reported a sharp earnings decline for fiscal 2008 as the global commodity downturn hit its results.
Net sales fell 20.3% to $4.85 billiona from $6.09 billion, and net earnings dropped 36.5% to $1.41 billion from $2.22 billion. The decline was driven by a roughly 16% drop in copper sales volume, largely from the ongoing illegal work stoppage at the Cananea mine in Mexico, and by lower metal prices late in the year. Fourth-quarter results were a net loss of $124.7 million, the first loss since the 2005 combination with Minera Mexico.
A provisional-pricing adjustment that reduced 2008 net sales by about $403.5 millionb amplified the fourth-quarter weakness. The company remains financially strong by its own account, with $716.7 million in cash, $1.3 billion in debt, no significant principal payments until 2015, and proven and probable reserves. Management has suspended most new capital projects, cut 2009 exploration to $22.7 million, and expects capex of about $392.6 million in 2009.
Dividends were $1.94c per share for 2008 (about $1.7 billion total), and the board declared a reduced $0.117 quarterly dividend for March 2009. Management expects future dividends to be lower than in recent years. Grupo Mexico's ownership rose to 79.0% (79.5% by February 23, 2009) after the company's buyback and purchases by its parent's affiliate.
For investors, the key issues are labor disruption at Cananea, Taxco, and San Martin, the trajectory of copper and molybdenum prices, the dividend outlook, and the controlling-shareholder dynamics with Grupo Mexico. The filing also flags ongoing litigation, including the Asarco-related fraudulent conveyance matter and derivative suits over the Minera Mexico acquisition. Investors should weigh the company's low-cost reserves and balance sheet against near-term earnings pressure and operational uncertainty.
02—Key points
Key Highlights
- Net sales fell 20.3% to $4,850.8 million in 2008 from $6,085.7 million in 2007, driven by lower volumes (copper sales down 16.2%) and lower metal prices.
- Net earnings declined 36.5% to $1,406.6 million ($1.60 per share) from $2,216.4 million, and the fourth quarter posted a $124.7 million loss.
- Cananea mine strike (since July 2007) and strikes at Taxco and San Martin reduced 2008 copper output by an estimated 425.6 million pounds and cut operating income by about $1.1 billion.
- Provisional pricing adjustments reduced 2008 net sales by about $403.5 million and net earnings by an estimated $251.5 million as metal prices fell late in the year.
- Balance sheet: $716.7 million cash, $1.31 billion total debt, debt-to-capitalization of 27.5%, and no significant principal repayments until 2015.
- Capital discipline: most new projects suspended, 2009 capex guided to about $392.6 million, and 2009 exploration budget cut to $22.7 million.
- Dividends paid totaled $1.94 per share in 2008 (about $1.7 billion), but future dividends are expected to be reduced; the March 2009 dividend was set at $0.117 per share.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2008filed March 2, 2009Financial Statements
FY2008 against FY2007
| Line item | FY2008FY2007 | Change |
|---|---|---|
| Cost of Revenue | $2.18B$2.12B | +2.8% |
| SG&A Expenses | $102.43M$98.05M | +4.5% |
| Operating Expenses | $2.65B$2.59B | +2.3% |
| Operating Income | $2.20B$3.50B | −37.0% |
| Net Income | $1.41B$2.22B | −36.5% |
| EPS (Basic) | $1.60$2.51 | −36.3% |
| EPS (Diluted) | $1.60$2.51 | −36.3% |
| Shares Outstanding (Basic) | 878.71M883.39M | −0.5% |
| Shares Outstanding (Diluted) | 878.71M883.39M | −0.5% |
05—Questions
Frequently Asked Questions
Why did Southern Copper's earnings fall so much in 2008?
Earnings fell because of lower sales volume, lower metal prices in the second half of the year, and higher production costs. Copper output dropped 17.4% largely due to the Cananea strike, and provisional price adjustments as copper and molybdenum prices collapsed in the fourth quarter reduced sales by about $403.5 million.
How serious are the labor disruptions at Cananea, Taxco, and San Martin?
They are a major concern. Cananea has been on strike since July 2007 with repeated court rulings reversed on appeal, and the January 2009 ruling went against the company. Management says Cananea will remain suspended until the labor issues are resolved, and there is no firm timeline. Strikes at Taxco and San Martin have also halted production, and the company is seeking favorable legal resolution.
Is the dividend at risk?
The dividend is likely to fall. Management stated that future distributions will be reduced from recent levels given the expansion program and the economic downturn, and the board said it will review dividend policy at each meeting. The declared March 2009 dividend of $0.117 per share is far below the 2008 total of $1.94.
What does Grupo Mexico's controlling stake mean for minority investors?
Grupo Mexico owns about 79.5% of the company as of February 2009 and controls board composition, dividend policy, asset sales, and major transactions. Its interests may diverge from those of minority shareholders, and the company has engaged in related-party transactions with Grupo Mexico affiliates. Litigation involving the parent and Asarco also creates potential risk.
How much financial flexibility does the company have to weather the downturn?
The company has $716.7 million in cash, $1.3 billion in debt with no significant principal payments until 2015, and it has suspended most capital projects. Operating cash flow was $1.72 billion in 2008. Management believes it can meet 2009 cash requirements from cash on hand, internal cash flow, and external financing if needed, though credit market conditions are a stated risk.
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