01—Abstract
Summary
Summary of the 10-K filed March 2, 2015. Cited figures are marked; the original filing is the authoritative source.
Southern Copper Corporation (SCCO), a majority-owned subsidiary (84.6%a) of Grupo Mexico, reported FY2014 results that reflected weaker metal prices and rising costs.
Net sales fell 2.8% to $5,787.7 millionb and net income attributable to SCC declined 17.6% to $1,333.0 million ($1.61 per share), as copper (78% of sales), silver and zinc prices dropped and a $91.4 million environmental remediation charge followed the August 2014 copper sulfate spill at Buenavista. Copper production and sales volumes rose (mined copper up 9.7% to 1.49 billion pounds; sales up 4.7%), and molybdenum output grew, partly offsetting the price pressure. Operating cash cost with by-product credits rose to $1.05/lb from $1.00/lb, while cash cost before by-products was roughly flat at $1.89/lb.
The balance sheet shows heavy investment: capital expenditures were $1,534.8 millionc, and management plans about $2.7 billion in 2015 to lift copper capacity roughly 89% to 1,165,000 tons by 2018, mainly via the Buenavista expansion, the Toquepala concentrator expansion and the Tia Maria project. Cash fell to $364 million from $1.67 billion, and net debt rose to $3.84 billion (net debt to net capitalization of 39.7%, up from 31.3%). Dividends were cut to $0.46 per share from $0.68 in 2013 and $4.06 in 2012, which reflected the 2012 special distribution.
The Board also raised the buyback authorization to $3 billiond and approved a $0.10 dividend for March 2015. Key risks include a material weakness in internal control over financial reporting related to access controls in the Mexican ERP system (an adverse auditor opinion on ICFR), the Buenavista spill and related litigation, a long-running strike at the Taxco and San Martin mines, and Peruvian and Mexican labor, tax and community-relations pressures. Investors will focus on whether the large capex program is delivered on time and budget, whether free cash flow can sustain dividends and buybacks given higher leverage, and whether the control weakness is remediated during 2015.
02—Key points
Key Highlights
- Net sales fell 2.8% to $5,787.7 million, and net income attributable to SCC fell 17.6% to $1,333.0 million ($1.61 per share), driven by lower copper, silver and zinc prices.
- Copper output and sales volume rose: mined copper increased 9.7% to 1,491.6 million pounds, and copper sales volume increased 4.7% to 1,448 million pounds, with Buenavista the largest contributor.
- Operating cash cost per pound was $1.89 before by-product credits (flat) and $1.05 after by-product credits (up from $1.00), with by-product credits weaker on lower silver and zinc prices.
- Capital expenditures of $1,534.8 million in 2014 are set to climb to about $2.7 billion in 2015 as the company targets copper capacity of 1,165,000 tons by 2018, an increase of about 89% over 2013.
- Net debt rose to $3,842 million (net debt/net capitalization 39.7% vs. 31.3%) as cash fell from $1.67 billion to $364 million; total debt is $4.2 billion, all fixed-rate.
- Dividends per share fell to $0.46 in 2014 from $0.68 in 2013 and $4.06 in 2012; the Board approved a $0.10 dividend payable March 3, 2015 and raised the buyback authorization to $3 billion.
- Management identified a material weakness in ICFR (access controls over the Mexican ERP system), and the auditor issued an adverse ICFR opinion; the Buenavista spill also produced a $91.4 million charge and ongoing criminal and collective-action proceedings in Mexico.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2014, Southern Copper Corp kept $0.23.
- Revenue$5.79B100.0%
- Cost of revenue−$3.29B56.8%
- Gross profit$2.50B43.2%
- Operating costs−$269.5M4.7%
- Operating income$2.23B38.6%
- Interest, other & tax−$899.7M15.5%
- Net income$1.33B23.0%
Where FY2014 revenue went
$5.79B- Cost of revenue: $2.84B, 49% of revenue
- Net income: $1.33B, 23% of revenue
- Interest, other & tax: $899.7M, 16% of revenue
- SG&A: $103.4M, 1.8% of revenue
- Other operating costs: $611.1M, 11% of revenue
Kept 23% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2014filed March 2, 2015Financial Statements
FY2014 against FY2013
| Line item | FY2014FY2013 | Change |
|---|---|---|
| Revenue | $5.79B$5.95B | −2.8% |
| Cost of Revenue | $2.84B$2.87B | −1.1% |
| Gross Profit | $2.50B$2.69B | −6.8% |
| SG&A Expenses | $103.40M$102.50M | +0.9% |
| Operating Expenses | $3.56B$3.42B | +3.9% |
| Operating Income | $2.23B$2.53B | −11.8% |
| Net Income | $1.33B$1.62B | −17.6% |
| EPS (Basic) | $1.61$1.92 | −16.1% |
| Shares Outstanding (Basic) | 828.20M842.70M | −1.7% |
05—Questions
Frequently Asked Questions
Why did net income decline in 2014 despite higher copper volumes?
Lower average prices for copper (LME down 6.3% to $3.11/lb), silver (down 20.1%) and by-products, together with a $91.4 million environmental remediation charge from the Buenavista spill, a higher effective tax rate (36.5% vs. 32.4%, including the new Mexican royalty), and higher depreciation and exploration spending, outweighed the benefit of higher production.
How will the company fund its large 2015 capital program?
Management expects to use cash on hand (about $364 million at year-end plus $338.6 million of short-term investments), internally generated cash flow (2014 operating cash flow was $1,355.9 million) and, if needed, additional external financing. Total debt is $4.2 billion, all fixed-rate, with the next maturity being $200 million of notes due in 2015.
Is the dividend at risk?
The 10-K states that future dividends may be reduced from recent levels in light of the capital investment program and global economic conditions. Dividends are at the discretion of the Board, and Minera Mexico's legal restrictions on upstream dividends and debt covenants could also limit payments. The 2014 payout was $0.46 per share, compared with $0.68 in 2013.
What is the material weakness and why does it matter to investors?
Management concluded that internal control over financial reporting was not effective at December 31, 2014, because processes did not restrict access to the Ellipse ERP system at the Mexican operations, so segregation of duties was not ensured. The auditor issued an adverse ICFR opinion. Management says no unauthorized entries were detected and that the SAP implementation starting February 2015 and the remediation plan will address it during 2015, but the weakness could lead to restatements or further reporting delays if not remediated.
What are the main operational and legal risks from the Buenavista spill and labor disputes?
The August 2014 spill of about 40,000 cubic meters of copper sulfate solution led to a trust of roughly $150 million for remediation and compensation, a $91.4 million accrual, a PROFEPA criminal complaint, and collective-action lawsuits, although management believes the aggregate impact will not be material. Separately, the Taxco and San Martin mines have been on strike since July 2007 and remain suspended, and Peruvian labor agreements expire in the second half of 2015, which could bring new wage or work-stoppage pressures.
06—Continue