01—Abstract
Summary
Summary of the 10-K filed February 26, 2010. Cited figures are marked; the original filing is the authoritative source.
Southern Copper Corporation (SCC, ticker changed from PCU to SCCO on February 17, 2010) reported a sharp earnings decline for fiscal 2009 as metal prices fell from 2008 levels, even though copper sales volume held roughly flat.
Net sales fell 23% to $3,734.3 milliona from $4,850.8 million, operating income dropped about 33% to $1,485.1 million, and net income attributable to SCC fell 34% to $929.4 million ($1.09 per share). The decline was driven mainly by lower molybdenum (down about 62%) and zinc prices, and by the absence of the 2008 copper derivative gains. Copper prices recovered strongly through 2009, closing the year at $3.33 per pound, which supports the company's outlook.
The main operating overhang is the Cananea mine in Mexico, which has been shut by a labor strike since July 2007. A Mexican federal labor court ruled in the company's favor on February 11, 2010, but restarting production will take months. Cananea's assets were not impaired at year-end, though the filing warns that a longer-than-expected delay or a sharp fall in metal prices could trigger a write-down.
The Tia Maria project in Peru (about $934 millionb budget) faces delayed environmental approval amid community opposition, and the company approved a $2.8 billion capital program for 2010-2012 intended to add about 342,000 tons of annual copper output. Financially, SCC remains strong, with cash of $772 million, total debt of about $1.28 billion, and a net debt to capitalization ratio of 11.6%.
The company is 80% owned by Grupo Mexico, which creates related-party and control risks for minority holders. Operating cash flow declined to $963 millionc, and the 2010 dividend was set at $0.43 per share.
02—Key points
Key Highlights
- Net sales fell 23% to $3.73 billion and net income attributable to SCC fell 34% to $929 million ($1.09/share), driven by lower molybdenum and zinc prices.
- Copper prices recovered through 2009, closing at $3.33/lb versus a 2009 low of about $1.38/lb, which supports the 2010 outlook.
- The Cananea mine remains shut by a strike since July 2007; a February 2010 court ruling favors the company, but restarting operations will take months.
- The Board approved a $2.8 billion capital program for 2010-2012, expected to add about 342,000 tons of annual copper production and 6,600 tons of molybdenum.
- Tia Maria (Peru, $934 million budget) is delayed pending environmental approval after community opposition; construction awaits the EIA.
- Grupo Mexico owns 80% of SCC, creating control and related-party risks; the company holds $1.8 billion of Mexican earnings as appropriated retained earnings.
- Balance sheet remains solid, with $772 million cash, $1.28 billion total debt, and an 11.6% net debt to total capitalization ratio.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2009, Southern Copper Corp kept $0.25.
- Revenue$3.73B100.0%
- Cost of revenue−$1.87B50.0%
- Gross profit$1.87B50.0%
- Operating costs−$383.3M10.3%
- Operating income$1.49B39.8%
- Interest, other & tax−$555.8M14.9%
- Net income$929.4M24.9%
Where FY2009 revenue went
$3.73B- Cost of revenue: $1.87B, 50% of revenue
- Net income: $929.4M, 25% of revenue
- Interest, other & tax: $555.8M, 15% of revenue
- SG&A: $85.2M, 2.3% of revenue
- Other operating costs: $298.2M, 8.0% of revenue
Kept 25% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2009filed February 26, 2010Financial Statements
FY2009 against FY2008
| Line item | FY2009FY2008 | Change |
|---|---|---|
| Revenue | $3.73B— | — |
| Cost of Revenue | $1.87B$2.18B | −14.5% |
| Gross Profit | $1.87B— | — |
| SG&A Expenses | $85.17M$102.43M | −16.9% |
| Operating Expenses | $2.25B$2.65B | −15.1% |
| Operating Income | $1.49B$2.20B | −32.6% |
| Net Income | $929.38M$1.41B | −33.9% |
| EPS (Basic) | $1.09$1.60 | −31.9% |
| EPS (Diluted) | $1.09$1.60 | −31.9% |
| Shares Outstanding (Basic) | 850.68M878.71M | −3.2% |
| Shares Outstanding (Diluted) | 850.68M878.71M | −3.2% |
05—Questions
Frequently Asked Questions
Why did Southern Copper's earnings decline sharply in 2009?
Net income attributable to SCC fell 33.9% to $929.4 million. The main causes were lower average metal prices (average LME copper down about 26% year over year, molybdenum down about 62%, and zinc down about 12%), lower sales volume from the Cananea strike, and the absence of the $137 million copper derivative gain booked in 2008. Lower workers' participation and fuel and power costs partially offset these declines.
What is the status of the Cananea mine strike and its financial impact?
Cananea has been shut since the July 2007 strike, with no production in 2009. On February 11, 2010, a Mexican federal labor court ruled that the damage caused by striking workers constituted force majeure, providing a legal basis for terminating the employees. The company expects compliance and hopes to recover control, but restarting will take months. Impairment testing showed no write-down at year-end, though a delay of more than a year could result in a charge of about $42 million.
What are the main growth projects and their risks?
The $2.8 billion 2010-2012 program includes the Tia Maria SX-EW project (about 260 million lbs/year, budget $934 million, $280 million spent through 2009) and the Toquepala concentrator expansion. Tia Maria's construction is delayed because the environmental impact assessment has not been approved after local communities disputed water use at a public hearing. Other projects, including El Arco and Los Chancas, are at earlier stages.
How strong is the balance sheet and how much does SCC pay in dividends?
At December 31, 2009, cash was $772 million, total debt was $1.28 billion, and net debt to total capitalization was 11.6%, down from 14.5% a year earlier. Operating cash flow was $963 million. The Board declared a $0.43 per share dividend payable March 4, 2010, but the company warned that future dividends could be reduced given its expansion program and economic conditions.
What are the key risks for minority shareholders?
Grupo Mexico controls about 80% of SCC and can determine board composition, dividend policy, and major transactions. The filing notes related-party dealings with Grupo Mexico and affiliates and the Larrea family. Mexican law restricts dividends from Minera Mexico to SCC, and the company has $1.8 billion of Mexican earnings earmarked for reinvestment. Operations are also exposed to Peruvian and Mexican political, labor, and currency risks.
06—Continue