10-QPeriod: Q1 FY2008

SOUTHERN COPPER CORP/ Quarterly Report for Q1 Ended Mar 31, 2008

Filed May 6, 2008For Securities:SCCO

Summary

Southern Copper Corporation (SCCO) reported solid financial results for the first quarter ended March 31, 2008, with net sales increasing to $1.5 billion, up from $1.36 billion in the prior year's comparable quarter. Net earnings also saw a modest increase to $565 million, or $1.92 per share, compared to $551.7 million, or $1.87 per share, in the first quarter of 2007. This growth was primarily driven by higher metal prices, particularly for copper and molybdenum, which offset a significant decrease in copper production primarily due to a prolonged strike at the Cananea mine in Mexico. Despite the operational challenges, including the continued strike at the Cananea mine which significantly impacted copper output, the company maintained a strong financial position. SCCO's balance sheet shows total assets of $6.78 billion and robust cash reserves of $1.47 billion. The company also announced a significant capital investment program in its Peruvian operations aimed at increasing copper production. However, investors should remain aware of the ongoing labor disputes, particularly at the Cananea mine, which pose a material risk to future production and profitability.

Key Highlights

  • 1Net sales increased by 10.4% to $1.499 billion in Q1 2008 from $1.358 billion in Q1 2007.
  • 2Net earnings rose by 2.4% to $565 million in Q1 2008 from $551.7 million in Q1 2007.
  • 3Earnings per share (diluted) increased to $1.92 in Q1 2008 from $1.87 in Q1 2007.
  • 4Mine copper production decreased significantly by 25.3% to 281.9 million pounds, primarily due to the strike at the Cananea mine.
  • 5Molybdenum production increased by 7.5% to 8.7 million pounds, contributing positively to revenue.
  • 6The company reported strong operating cash flow of $503.3 million in Q1 2008.
  • 7SCCO is undertaking a $2.1 billion investment program in its Peruvian operations to increase copper production by 39% by 2011.

Frequently Asked Questions

The increase in net sales was primarily driven by higher average metal prices for copper and molybdenum, as well as higher molybdenum sales volume. This was partially offset by a significant decrease in copper production due to the strike at the Cananea mine.

The prolonged strike at the Cananea mine significantly reduced copper production, leading to a 25.3% decrease in overall mine copper production for the quarter. The company is evaluating the impact of this labor situation and has offered severance packages to employees, with production expected to remain suspended until resolved.

Southern Copper utilizes derivative instruments, such as copper collar and swap contracts, to manage exposure to commodity price volatility. They also use exchange rate derivatives (USD/MXN) to hedge against currency fluctuations, particularly given that a significant portion of costs are in Mexican Pesos while revenues are largely in US Dollars.

The company is focused on a $2.1 billion investment program in its Peruvian operations aimed at increasing copper production by 39% by 2011. They also plan to invest approximately $1.2 billion in the Los Chancas project in Peru, subject to social and governmental approvals, which is expected to increase annual copper production by 80,000 tons.