Why did Southern Copper's earnings decline in 2023 despite higher copper and molybdenum volumes?

Sales were reduced by a $406.0 million year-end accounting adjustment for lower metal prices, and the company estimates a larger copper anode inventory in process also weighed on sales. Adjusted EBITDA was further reduced by a $113 million nonrecurring drop in other income from 2022 insurance and tax refunds, and by a $54.1 million increase in operating costs. Excluding the adjustment and inventory effect, management says sales would have been 3.2% higher than 2022.

How strong is the company's cash generation and balance sheet position?

Operating cash flow was $3,573.1 million in 2023, up 27.5%, largely from working capital reduction. Cash and short-term investments were about $1,750.8 million at year-end (cash of $1,151.5 million plus short-term investments of $599.3 million), down from $2,278.0 million a year earlier. Long-term debt was $6,254.6 million, so leverage is substantial relative to cash, though the company paid $3,092.4 million in dividends during 2023.

What is the outlook for production and growth projects?

For 2024, the company expects 935,900 tons of copper, 117,800 tons of zinc, 20.7 million ounces of silver and 25,500 tonnes of molybdenum. Pilares and the Buenavista zinc concentrator are expected to add 44,000 tons of copper and 54,000 tons of zinc. The capital program for this decade exceeds $15 billion, including Tia Maria ($1.4 billion, construction expected to begin soon), Los Chancas ($2.6 billion, operations expected in 2030) and Michiquillay ($2.5 billion, production expected by 2032). Permitting and execution are key risks, including the Buenavista water-supply issue.

Is the $0.80 per share dividend a concern given the earnings decline?

The $0.80 dividend declared January 25, 2024 is payable February 29, 2024 to holders of record on February 13, 2024. Dividends paid in 2023 totaled $4.00 per share, or $3,092.4 million, which exceeded net income of $2,425.2 million, so payouts are running above earnings. Investors should weigh the dividend against the company's large capital program and the cash flow benefit from working capital release, which may not recur.

SCCO 8-K: Earnings & Results

01—Abstract

Summary

Summary of the 8-K filed February 2, 2024. Cited figures are marked; the original filing is the authoritative source.

Southern Copper's (SCCO) 8-K, furnished under Item 2.02, reports fourth-quarter and full-year 2023 results.

For FY2023, net sales were $9,895.8 million^a, down 1.5% year over year, and net income attributable to SCC was $2,425.2 million, down 8.1%. Adjusted EBITDA was $5,029.5 million (50.8% margin) versus 53.2% in 2022. Results were weighed down by a $406.0 million year-end accounting adjustment for lower metal prices.

Excluding that adjustment and the copper anode inventory build, management says sales would have been 3.2% higher than 2022. Operating cash flow rose 27.5% to $3,573.1 million^b, driven mainly by a working capital reduction, and capital investments rose 6.3% to $1,008.6 million. Fourth-quarter performance was weaker.

Net sales fell 18.6% to $2,295.6 million^c, net income fell 50.7% to $445.0 million, and adjusted EBITDA fell 35.3% to $1,055.5 million. The quarter also carried a $168.4 million accounting adjustment for lower metal prices. The operating cash cost per pound of copper net of by-product credits rose to $1.03 for the year from $0.78 in 2022, and to $1.25 in 4Q23.

Management highlighted the Pilares expansion reaching full capacity and the Buenavista zinc concentrator starting ramp-up, and guided to 935,900 tons of copper production in 2024 (+2.7%). The company also declared a $0.80^d per share dividend payable February 29, 2024, to holders of record on February 13, 2024. For investors, the key takeaways are a softer earnings year and quarter driven by metal price adjustments and higher unit costs, offset by strong cash generation and a clear growth pipeline.

The more than $15 billion capital program for this decade, including Tia Maria, Los Chancas and Michiquillay in Peru, carries execution and permitting risk, and the Buenavista water-supply constraint is a near-term operational watch item. Grupo Mexico owns 88.9% of the company, which is relevant to minority shareholders.

02—Key points

Key Highlights

FY2023 net sales of $9,895.8M were down 1.5% YoY; a $406.0M year-end accounting adjustment for lower metal prices weighed on results, while volumes rose for copper (+2.2%) and molybdenum (+2.3%).
FY2023 net income attributable to SCC was $2,425.2M (-8.1%), with EPS of $3.14 versus $3.41; adjusted EBITDA was $5,029.5M (-6.0%), with margin compressing to 50.8% from 53.2%.
4Q23 was weak: net sales fell 18.6% to $2,295.6M, net income fell 50.7% to $445.0M, and adjusted EBITDA fell 35.3% to $1,055.5M after a $168.4M quarterly price adjustment.
Operating cash flow rose 27.5% to $3,573.1M, mainly from a working capital reduction, while capital investments rose 6.3% to $1,008.6M.
Operating cash cost per pound of copper net of by-products rose to $1.03 in 2023 from $0.78 in 2022, driven by higher production costs and lower by-product credits.
2024 guidance calls for 935,900 tons of copper (+2.7%), 117,800 tons of zinc (+79.8%) and 20.7M oz of silver (+12.2%), with Pilares at full capacity and the Buenavista zinc concentrator ramping up.
Board declared a $0.80 per share dividend payable February 29, 2024 to holders of record on February 13, 2024; Grupo Mexico owns 88.9% of shares.

03—Questions

Frequently Asked Questions

Why did Southern Copper's earnings decline in 2023 despite higher copper and molybdenum volumes?
Sales were reduced by a $406.0 million year-end accounting adjustment for lower metal prices, and the company estimates a larger copper anode inventory in process also weighed on sales. Adjusted EBITDA was further reduced by a $113 million nonrecurring drop in other income from 2022 insurance and tax refunds, and by a $54.1 million increase in operating costs. Excluding the adjustment and inventory effect, management says sales would have been 3.2% higher than 2022.
How strong is the company's cash generation and balance sheet position?
Operating cash flow was $3,573.1 million in 2023, up 27.5%, largely from working capital reduction. Cash and short-term investments were about $1,750.8 million at year-end (cash of $1,151.5 million plus short-term investments of $599.3 million), down from $2,278.0 million a year earlier. Long-term debt was $6,254.6 million, so leverage is substantial relative to cash, though the company paid $3,092.4 million in dividends during 2023.
What is the outlook for production and growth projects?
For 2024, the company expects 935,900 tons of copper, 117,800 tons of zinc, 20.7 million ounces of silver and 25,500 tonnes of molybdenum. Pilares and the Buenavista zinc concentrator are expected to add 44,000 tons of copper and 54,000 tons of zinc. The capital program for this decade exceeds $15 billion, including Tia Maria ($1.4 billion, construction expected to begin soon), Los Chancas ($2.6 billion, operations expected in 2030) and Michiquillay ($2.5 billion, production expected by 2032). Permitting and execution are key risks, including the Buenavista water-supply issue.
Is the $0.80 per share dividend a concern given the earnings decline?
The $0.80 dividend declared January 25, 2024 is payable February 29, 2024 to holders of record on February 13, 2024. Dividends paid in 2023 totaled $4.00 per share, or $3,092.4 million, which exceeded net income of $2,425.2 million, so payouts are running above earnings. Investors should weigh the dividend against the company's large capital program and the cash flow benefit from working capital release, which may not recur.

04—Continue

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