10-QPeriod: Q3 FY2014

SOUTHERN COPPER CORP/ Quarterly Report for Q3 Ended Sep 30, 2014

Filed October 31, 2014For Securities:SCCO

Summary

Southern Copper Corporation (SCCO) reported its third-quarter and nine-month results for the period ending September 30, 2014. For the nine months, net sales decreased by 2.3% to $4.316 billion compared to the same period in 2013, primarily due to lower copper and silver prices, partially offset by increased molybdenum and zinc prices and higher sales volumes for copper and molybdenum. Net income attributable to SCCO also saw a significant decrease, falling by 18.7% to $985 million from $1.212 billion in the prior year's nine-month period. This decline was largely driven by the lower sales revenue and a higher effective income tax rate, influenced by new Mexican royalty taxes and environmental remediation provisions. The company highlighted a 6.1% increase in third-quarter copper mined production and a 9.1% increase for the nine-month period, largely driven by higher output at its Buenavista mine and improvements at Cuajone. However, zinc and silver production experienced declines. The company also experienced an environmental incident at its Buenavista del Cobre operations involving a copper sulfate solution spill, which has resulted in the establishment of a $150 million trust fund for remediation and compensation. Despite these challenges, SCCO is progressing with significant capital investment programs aimed at increasing copper production capacity by approximately 87% by 2017.

Financial Highlights

48 data points
Beta

Revenue

$1.47B

43.5% Gross Margin

Net Income

$324.30M

22.0% Net Margin

EPS (Diluted)

$0.39

Total Assets

$11.50B

Cash & Equivalents

$1.03B

Free Cash Flow

$24.15M

Financial Statements
Beta
Revenue$1.47B
Cost of Revenue$729.51M
Gross Profit$641.60M
SG&A Expenses$26.28M
Operating Expenses$927.51M
Operating Income$547.00M
Net Income$324.30M
EPS (Basic)$0.39
Shares Outstanding (Basic)829.22M

Key Highlights

  • 1Net sales for the nine months ended September 30, 2014, decreased by 2.3% to $4.316 billion, primarily due to lower copper and silver prices.
  • 2Net income attributable to SCCO decreased by 18.7% to $985 million for the nine months ended September 30, 2014, compared to $1.212 billion in the prior year.
  • 3Copper mined production increased by 6.1% in Q3 2014 and 9.1% for the nine-month period, driven by improved performance at the Buenavista mine.
  • 4Zinc and silver production declined by 33.0% and 2.8%, respectively, for the nine-month period, attributed to lower grades and operational disruptions.
  • 5An environmental incident involving a copper sulfate solution spill occurred at the Buenavista del Cobre operations, leading to the establishment of a $150 million trust fund for remediation.
  • 6Capital expenditures for the nine months totaled $1.111 billion, reflecting ongoing investments in projects aimed at increasing copper production capacity.
  • 7The effective income tax rate increased to 38.3% for the nine months of 2014 from 33.5% in 2013, due to new Mexican royalty taxes and environmental remediation provisions.

Frequently Asked Questions

The decrease in net sales for the nine months ended September 30, 2014, was primarily driven by lower average prices for copper and silver. This was partially offset by higher prices for molybdenum and zinc, as well as increased sales volumes for copper and molybdenum. The significant decrease in net income was due to lower revenues coupled with an increased effective tax rate, which was impacted by new Mexican royalty taxes and a provision for environmental remediation related to the Buenavista spill.

Southern Copper anticipates continued softness in copper prices through the end of 2014 and into 2015. However, the company believes that current prices are not sufficient to stimulate the necessary future supply growth, supporting strong long-term fundamentals for the industry. They noted a shift in market sentiment from a surplus to a balanced market or a small deficit for 2014 due to supply-side constraints.

An accidental spill of copper sulfate solution occurred on August 6, 2014. In response, Southern Copper established a 2 billion peso (approximately $150 million) trust fund to support remedial actions, implement an environmental remediation plan, and compensate affected parties. The company also incurred an environmental remediation provision of $37.2 million related to this spill, which impacted operating costs and the effective tax rate.

Southern Copper is continuing its significant capital investment programs, with $1.111 billion spent on capital expenditures in the first nine months of 2014. Key projects include the expansion of the Buenavista mine in Mexico, which aims to significantly increase copper and molybdenum production, and the Toquepala expansion project in Peru, expected to boost copper and molybdenum output. The company has a total capital budget of $2.3 billion for 2014 and aims to increase its copper production capacity by approximately 87% by 2017.