01—Abstract
Summary
Summary of the 10-K filed February 27, 2012. Cited figures are marked; the original filing is the authoritative source.
Southern Copper Corporation (SCC), a majority-owned subsidiary of Grupo Mexico (80.9% ownership), reported record results for fiscal 2011, with net sales of $6,818.7 milliona (up 32% from $5,149.5 million) and net income attributable to SCC of $2,336.4 million (up 50%).
Earnings per share were $2.76b versus $1.83 in 2010. The growth was driven mainly by the full restoration of the Buenavista mine after a roughly three-year strike, which lifted copper sales volume 19.3%, together with higher average copper (+17%) and silver (+74%) prices. Copper production rose to 1,295 million pounds from 1,055 million, although Peruvian output fell on lower ore grades at Cuajone.
The key pressures are rising costs and a heavier capital program. Operating cash cost per pound excluding by-products rose to 165.7 cents from 152.0 cents, and including by-product credits it rose to 41.5 cents from 18.0 cents. The company budgeted $1.5 billionc of 2012 capital spending, with a five-year program to expand Buenavista to 488,000 tons of copper annually.
Net debt rose to $1.9 billiond from $568 million, and net debt to net capitalization reached 32% from 12.7%, as cash fell after a $2.08 billion dividend and $274 million of buybacks. Several projects face permitting and community opposition in Peru, including Tia Maria (start-up pushed to 2015) and the Toquepala expansion. Large legal exposures also remain, including the Lemon Bay derivative judgment of about $1.35 billion plus $685 million of interest, which is under appeal, and the Peruvian labor-share claims.
For investors, the filing shows a highly profitable copper producer with a 53.2% operating margin, strong operating cash flow of $2.07 billion, and an S&P upgrade to BBB in January 2012. Against that, the dividend, large capex, and litigation outcomes will determine how much of the earnings reaches shareholders.
02—Key points
Key Highlights
- Record net sales of $6.82 billion (+32% YoY) and net income attributable to SCC of $2.34 billion (+50% YoY); EPS of $2.76 versus $1.83 in 2010.
- Buenavista mine fully restored in Q2 2011 after a strike from July 2007 to June 2010, lifting mined copper to 1.295 billion lbs (+22.8%) and copper sales volume 19.3%.
- Full-year 2011 dividends of $2.46 per share (versus $1.68 in 2010), plus a $0.19 cash dividend and stock dividend declared January 26, 2012.
- Operating cash cost per pound rose to 41.5 cents including by-products (18.0 cents in 2010) and to 165.7 cents excluding by-products (152.0 cents in 2010), reflecting higher fuel, power, and third-party concentrate costs.
- Net debt increased to $1.90 billion from $568 million; net debt/net capitalization rose to 32.0% from 12.7%, after $2.08 billion of dividends and $274 million of share buybacks.
- 2012 capex budget of $1.5 billion (about $1.0 billion in Mexico, including the Buenavista expansion), and 2012 copper production guidance of 640,000 tons.
- Material legal and project risks: the Lemon Bay derivative judgment (~$1.35 billion plus $685 million of interest, under appeal), Peruvian labor-share suits, and Tia Maria delayed to 2015 after community opposition.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2011, Southern Copper Corp kept $0.34.
- Revenue$6.82B100.0%
- Cost of revenue−$3.05B44.7%
- Gross profit$3.77B55.3%
- Operating costs−$142.0M2.1%
- Operating income$3.63B53.2%
- Interest, other & tax−$1.29B18.9%
- Net income$2.34B34.3%
Where FY2011 revenue went
$6.82B- Cost of revenue: $2.76B, 41% of revenue
- Net income: $2.34B, 34% of revenue
- Interest, other & tax: $1.29B, 19% of revenue
- SG&A: $104.5M, 1.5% of revenue
- Other operating costs: $325.7M, 4.8% of revenue
Kept 34% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2011filed February 27, 2012Financial Statements
FY2011 against FY2010
| Line item | FY2011FY2010 | Change |
|---|---|---|
| Revenue | $6.82B$5.15B | +32.4% |
| Cost of Revenue | $2.76B$2.13B | +29.8% |
| Gross Profit | $3.77B$2.74B | +37.6% |
| SG&A Expenses | $104.47M$100.29M | +4.2% |
| Operating Expenses | $3.19B$2.55B | +25.5% |
| Operating Income | $3.63B$2.60B | +39.2% |
| Net Income | $2.34B$1.55B | +50.3% |
| EPS (Basic) | $2.73$1.81 | +50.8% |
| Shares Outstanding (Basic) | 854.65M859.00M | −0.5% |
| Shares Outstanding (Diluted) | 854.65M859.00M | −0.5% |
05—Questions
Frequently Asked Questions
What drove the large increase in 2011 earnings?
Net income attributable to SCC rose $782 million to $2.34 billion, mainly because Buenavista returned to full production in Q2 2011, adding about $1.08 billion of Mexican open-pit sales. Average LME copper prices rose about 17% to $4.00/lb and silver rose 74% to $35.18/oz, while higher operating costs and a 32% effective tax rate partly offset these gains.
Is the dividend sustainable given the capital spending plans?
The 2011 dividend of $2.46 per share (about $2.08 billion) exceeded cash from operations after capex, and net debt roughly tripled to $1.9 billion. The company says future dividends could be reduced from recent levels in light of the capital investment program, and dividend levels remain at the discretion of the board, subject to contractual and government limits.
How exposed is SCC to copper prices and by-products?
Copper made up about 76.7% of 2011 net sales and by-products (molybdenum, silver, zinc) about 23.3%. Each $0.01/lb change in copper moves 2012 net income by about $7.7 million, and each $1.00/lb change in molybdenum moves it by about $22.4 million. Roughly 80% of metal production is sold under annual or longer-term contracts, with provisional pricing on some sales.
What are the biggest legal and political risks?
The Lemon Bay derivative judgment (Delaware) awards about $1.35 billion in damages plus $685 million of pre-judgment interest against AMC, with $305 million of attorneys' fees payable by SCC; all parties have appealed. In Peru, Tia Maria was suspended after protests and its start-up is now 2015, and Toquepala's expansion hearing was declared invalid. Peruvian labor-share claims could also result in significant payments, though management has not recorded a provision.
Why did Peruvian copper output decline in 2011?
Peruvian open-pit production fell about 85 million lbs, largely because of lower ore grades at the Cuajone mine, while La Caridad was down about 10 million lbs on lower grades and recoveries. Zinc output from the IMMSA unit fell 15.5% because the Santa Eulalia mine was flooded and remained suspended, and the Taxco and San Martin mines stayed on strike.
06—Continue