SOUTHERN COPPER CORPORATION 
EXECUTIVE SUMMARY
This Management's Discussion and Analysis of Financial Condition and Results of Operations relates to and should be read together with our Audited Consolidated Financial Statements as of and for each of the years in the three-year period endedDecember 31, 2019 . Therefore, unless otherwise noted, the discussion below of our financial condition and results of operations is forSouthern Copper Corporation and its subsidiaries (collectively, "SCC," "Southern Copper ," "the Company," "our," and "we") on a consolidated basis for all periods. Our financial results may not be indicative of our future results. This discussion contains forward-looking statements that are based on management's current expectations, estimates and projections about our business and operations. Our actual results may differ materially from those currently anticipated and expressed in the forward-looking statements as a result of a number of factors. See Item 1 "Business-Cautionary Statement." EXECUTIVE OVERVIEW Business: Our business is primarily the production and sale of copper. In the process of producing copper, a number of valuable metallurgical by-products are recovered, which we also produce and sell. Market forces outside of our control largely determine the sale prices for our products. Our management, therefore, focuses on value creation through copper production, cost control, production enhancement and maintaining a prudent capital structure to remain profitable. We endeavor to achieve these goals through capital spending programs, exploration efforts and cost reduction programs. Our aim is to remain profitable during periods of low copper prices and to maximize financial performance in periods of high copper prices. We are one of the world's largest copper mining companies in terms of production and sales with our principal operations inPeru and Mexico. We also have an active ongoing exploration program inChile ,Argentina andEcuador . In addition to copper, we produce significant amounts of other metals, either as a by-product of the copper process or in a number of dedicated mining facilities inMexico .
Net sales in 2019 were
In 2019, we invested
We believe we hold the world's largest copper reserve position. AtDecember 31, 2019 , our copper ore reserves, calculated at a copper price of$2.90 per pound, totaled 67.6 million tons of contained copper, at the following locations: Copper contained in ore reserves Thousand tons Mexican openpit 31,004 Peruvian operations 21,718 IMMSA 248 Development projects 14,604 Total 67,574
Outlook: Various key factors affect our outcome. These include, but are not limited to, the following:
Changes in copper, molybdenum, silver and zinc prices: In 2019, the average LME
and COMEX per pound copper prices were
2018. Average molybdenum and zinc prices decreased in 2019 by 5.0% and 12.8%,
respectively, compared to 2018.
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Sales structure: In the last three years, approximately 81.0% of our revenues ? came from the sale of copper, 6.7% from molybdenum, 4.4% from zinc, 4.3% from
silver and 3.6% from various other products, including gold, sulfuric acid and
other materials.
Copper: During the last quarter of 2019, the LME copper price decreased, from
an average of
of today, we are seeing prices in the range of
reflection of the worldwide concern regarding the effect of COVID-19 disease, ? also known as Coronavirus. The world is now starting to feel the financial and
economic impacts from the outbreak but at this point, it is difficult to assess
the full effect of this event on copper demand. However, we hope that the
outbreak, if timely contained, would have a milder impact on the global economy
ending in a V shape recovery for copper demand. For supply, we maintain our view of it growing at 2.0% to 2.5% for this year, contingent of not being affected significantly by the disease. Consequently, we expect a mild copper market surplus for this year.
Molybdenum: It represented approximately 7.6% of our sales in 2019. Molybdenum
? prices averaged
decrease.
Molybdenum is mainly used for the production of special alloys of stainless steel that require significant hardness, corrosion and heat resistance. A new use for this metal is in lubricants and sulfur filtering of heavy oils and
shale gas production.
Zinc: It has very good long term fundamentals due to its significant industrial ? consumption and the expected production. Zinc represented 3.8% of our sales in
2019.
Silver: We believe that silver prices will have support due to its industrial ? uses as well as being perceived as a value shelter in times of economic
uncertainty. Silver represented 4.5% of our sales in 2019.
Production: In the second quarter of 2019, we reached full production at the ? new Toquepala concentrator which produced 101,738 tons of copper in 2019. For
2020, we expect to produce 998,400 tons of copper, in line with the 993,822
tons we produced in 2019. We also expect to produce 23.7 million ounces of silver, about 16% higher than the 2019 production of 20.3 million ounces mainly resulting from the important contribution of theSan Martin andSanta Barbara operations of IMMSA. In 2020, we expect to produce 80,600 tons of zinc from our mines, up 9% from 2019 production of 73,922 tons, as result of the recovery of production at theSan Martin mine. Additionally, we expect to produce 26,700 tons of molybdenum, in line with 2019 production of 26,885 tons.
Cost: Our operating costs and expenses for the three years ended
the three year period is as follows:
Variance
2019 2018 2017 Value %
Operating costs and expenses (in
millions) $ 4,532.6 $ 4,215.5 $ 4,035.6 $ 317.1 7.5 %
Operating costs and expenses in 2019 increased$317.1 million , compared to 2018, mainly due to higher cost of sales in all our operating segments, as well as higher depreciation, amortization and depletion at our Peruvian operations due to the completion of the Toquepala expansion project. Operating costs and expenses in 2018 increased$179.9 million , compared to 2017, mainly due to higher cost of sales in all our operating segments, as well as higher depreciation, amortization and depletion at our Mexican operations. This was partially offset by lower depreciation, amortization and depletion at our Peruvian operations, lower exploration expenses and a$10.2 million credit related to a previously accrued environmental remediation cost at our Mexican operations which was reversed in the first quarter of 2017. 67 Table of Contents
Capital investments: Capital investments were
36.9% lower than in 2018, and represented 47.0% of net income. Our growth ? program to develop the full production potential of our Company is underway. We
are currently developing a new organic growth plan to increase our copper volume production to 1.5 million tons by 2028 with the development of new projects.
For 2020, the Board of Directors approved a capital investment program of
KEY MATTERS We discuss below several matters that we believe are important to understand our results of operations and financial condition. These matters include (i) earnings, (ii) production, (iii) "operating cash costs" as a measure of our performance, (iv) metal prices, (v) business segments, (vi) the effect of inflation and other local currency issues and (vii) our capital investment
and exploration program.
Earnings: The table below highlights key financial and operational data of our Company for the three years endedDecember 31, 2019 (in millions, except copper price and per share amounts): Variance 2019 2018 2017 2019 - 2018 2018 - 2017 Copper price LME 2.72 2.96 2.80 (0.24) 0.16 Pounds of copper sold 2,173.8 1,952.9 1,959.2
220.9 (6.3)
Net sales $ 7,285.6 $ 7,096.7 $ 6,654.5 $ 188.9 $ 442.2
Operating income $ 2,753.0 $ 2,881.2 $ 2,618.9 $ (128.2) $ 262.3 Income before income taxes$ 2,426.5 $ 2,589.4 $ 2,302.7 $ (162.9) $ 286.7 Net income attributable to SCC$ 1,485.8 $ 1,543.0 $ 728.5
$ (57.2) $ 814.5 Earnings per share$ 1.92 $ 2.00 $ 0.94 $ (0.08) $ 1.06 Dividends per share$ 1.60 $ 1.40 $ 0.59 $ 0.20 $ 0.81
Net sales in 2019 of$7.3 billion were the highest in our history and were higher than in 2018 by$188.9 million . This increase was mainly the result of higher copper (+11.3%), molybdenum (+21.7%) and silver (+5.7%) sales volumes, partially offset by lower copper (-8.1%) and molybdenum (-5.0%) prices. Net sales in 2018 were higher than in 2017 by$442.2 million . This increase was mainly the result of higher copper (+5.7%) and molybdenum (+45.9%) prices and higher sales volumes of silver (+15.3%) and molybdenum (+3.3%), partially offset by lower silver prices (-8.1%) and lower zinc sales volume (-1.0%). The two largest components of operating costs and expenses are cost of sales and depreciation, amortization and depletion, both of which increased in each of the years in the periods above. In 2019, cost of sales increased by$197.4 million and depreciation, amortization and depletion increased by$90.1 million . The increase in cost of sales in 2019 was mainly due to higher repairing materials and operating contractors' costs, as well as lower capitalized leachable material. This was partially offset by a lower cost of metals purchased from third parties. In 2018, cost of sales increased by$156.2 million and depreciation, amortization and depletion increased by$3.2 million . The increase in cost of sales in 2018 was mainly due to higher fuel costs, higher workers' participation expense and inventory consumption. Despite the higher sales volumes reported at competitive costs, net income attributable to SCC in 2019 was 3.6% lower than in 2018 mainly due to lower prices for copper and molybdenum, as mentioned previously. Net income attributable to SCC in 2018 was 111.8% higher than in 2017 mainly due to the one-time, non-cash income tax adjustment of$785.9 million recorded in 2017 as result of theU.S. income tax legislation enacted in the fourth quarter of 2017. See Note 7 "Income Taxes", of our consolidated financial statements.
Production: The table below highlights, mine production data of our Company for
the three years ended
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Variance
2019 - 2018 2018 - 2017
2019 2018 2017 Volume % Volume %
Copper (in million
pounds) 2,191.0 1,948.2 1,933.4 242.8 12.5 % 14.8 0.8 %
Molybdenum (in
million pounds) 59.3 48.5 47.0 10.8 22.3 % 1.5 3.2 %
Zinc (in million
pounds) 163.0 156.0 151.4 7.0 4.4 % 4.6 3.0 %
Silver (in million
ounces) 20.3 17.3 15.9 3.0 17.1 % 1.4 8.8 %
The table below highlights copper production data at each of our mines for the
three years ended
Variance
2019 - 2018 2018 - 2017
Copper (in million pounds): 2019 2018 2017 Volume % Volume %
Toquepala 568.8 375.4 326.4 193.4 51.5 % 49.0 15.0 %
Cuajone 344.8 354.0 348.5 (9.2) (2.6) % 5.5 1.6 %
La Caridad 293.4 292.1 296.9 1.3 0.4 % (4.8) (1.6) %
Buenavista 965.8 913.0 949.5 52.8 5.8 % (36.5) (3.8) %
IMMSA 18.2 13.7 12.1 4.5 32.9 % 1.6 13.2 %
Total mined copper 2,191.0 1,948.2 1,933.4 242.8 12.5 % 14.8 0.8 %
2019 compared to 2018:
Copper mine production in 2019 increased 12.5% to 2,191.0 million pounds from 1,948.2 million pounds in 2018. This increase was due to:
Higher production at the Toquepala mine (+51.5%), as a result of additional ? copper production of 93,108 tons from the successful ramping up of the new
concentrator.
? Higher production at the
at our new
? Higher production at the IMMSA operations (+32.9%), as result of the
restoration of the
Molybdenum production increased 22.3% in 2019 compared to 2018 due to higher production at all of our mines, principally at the Toquepala mine (+75%) due to the successful ramping up of the new molybdenum plant that started production inApril 2019 .
Zinc production increased 4.4% in 2019, as a result of higher production at ourSanta Barbara mine due to higher grades and recoveries, as well as the restored production of 5,837 tons from ourSan Martin mine.
Mined silver production increased 17.1% in 2019 compared to 2018, mainly due to
higher production at our Toquepala (+60.5%), IMMSA (+22.9%) and
2018 compared to 2017:
Copper mine production in 2018 increased 0.8% to 1,948.2 million pounds from 1,933.4 million pounds in 2017. This increase was due to:
? Higher production at the Toquepala and Cuajone mines due to higher ore grades
and recoveries, which was partially offset by
Lower production at the
(-20.1%). In 2018, the Company initiated a 12-month corrective program to ? overcome this temporary reduction in production. The program includes
depositing the minerals in different leaching pads depending on the
characteristics of the ore. Also, the Company
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has implemented improvements and controls in the ore fragmentation that occurs
in the blasting, to avoid the fine materials that may cause clogging in the
recovery process. Molybdenum production increased 3.1% in 2018 compared to 2017, principally due to higher production at theBuenavista mine due to higher recoveries. This increase was partially offset by lower production at our Peruvian mines due to lower ore grades and recoveries.
Zinc production increased 3.1% in 2018, due to higher production at our
Mined silver production increased 8.7% in 2018 compared to 2017, as we had increased silver production at all of our mines, except for our Cuajone mine.
Operating Cash Costs: An overall benchmark used by us and a common industry metric to measure performance is operating cash costs per pound of copper produced. Operating cash cost is a non-GAAP measure that does not have a standardized meaning and may not be comparable to similarly titled measures provided by other companies. This non-GAAP information should not be considered in isolation or as substitute for measures of performance determined in accordance with GAAP. A reconciliation of our operating cash cost per pound of copper produced to the cost of sales (exclusive of depreciation, amortization and depletion) as presented in the consolidated statement of earnings is presented under the subheading, "Non-GAAP Information Reconciliation" on page 91. We disclose operating cash cost per pound of copper produced, both before and net of by-product revenues. We define operating cash cost per pound of copper produced before by-product revenues as cost of sales (exclusive of depreciation, amortization and depletion), plus selling, general and administrative charges, treatment and refining charges net of sales premiums; less the cost of purchased concentrates, workers' participation and other miscellaneous charges, including royalty charges, and the change in inventory levels; divided by total pounds of copper produced by our own mines.
In our calculation of operating cash cost per pound of copper produced, we exclude depreciation, amortization and depletion, which are considered non-cash expenses. Exploration is considered a discretionary expenditure and is also excluded. Workers' participation provisions are determined on the basis of pre-tax earnings and are also excluded. Additionally excluded from operating cash costs are items of a non-recurring nature and the mining royalty charge as it is based on various calculations of taxable income, depending on which jurisdiction,Peru or Mexico, is imposing the charge. We believe these adjustments will allow our management and stakeholders to see a presentation of our controllable cash cost, which we consider is one of the lowest of copper producing companies of similar size. We define operating cash cost per pound of copper produced net of by-product revenues as operating cash cost per pound of copper produced, as defined in the previous paragraph, less by-product revenues and net revenue (loss) on sale of metal purchased from third parties. In our calculation of operating cash cost per pound of copper produced, net of by-product revenues, we credit against our costs the revenues from the sale of all our by-products, including, molybdenum, zinc, silver, gold, etc. and the net revenue (loss) on sale of metals purchased from third parties. We disclose this measure including the by-product revenues in this way because we consider our principal business to be the production and sale of copper. As part of our copper production process, much of our by-products are recovered. These by-products, as well as the processing of copper purchased from third parties, are a supplemental part of our production process and their sales value contribute to cover part of our incurred fixed costs. We believe that our Company is viewed by the investment community as a copper company, and is valued, in large part, by the investment community's view of the copper market and our ability to produce copper at a reasonable cost. We believe that both of these measures are useful tools for our management and our stakeholders. Our cash costs before by-product revenues allow us to monitor our cost structure and address with operating management areas of concern. The measure operating cash cost per pound of copper produced net of by-product revenues is a common measure used in the copper industry and is a useful management tool that allows us to track our performance and better allocate
our
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resources. This measure is also used in our investment project evaluation
process to determine a project's potential contribution to our operations, its
competitiveness and its relative strength in different price scenarios. The
expected contribution of by-products is generally a significant factor used by
the copper industry in determining whether to move forward with the development
of a new mining project. As the price of our by-product commodities can have
significant fluctuations from period to period, the value of its contribution to
our costs can be volatile.
Our operating cash cost per pound of copper produced, as defined above, is
presented in the table below for the three years ended
Operating cash cost per pound of copper produced(1)
(In millions, except cost per pound and percentages)
2019 - 2018 2018 - 2017
2019 2018 2017 Value % Value %
Total operating cash cost
before byproduct revenues $ 3,230.9 $ 2,904.4 $ 2,797.5 $ 326.5 11.2 % $ 106.9 3.8 %
Total byproduct revenues $ (1,359.2) $ (1,267.7) $ (1,080.4) $ (91.5) 7.2 % (187.3) 17.3 %
Total operating cash cost
net of byproduct revenues $ 1,871.7 $ 1,636.7 $ 1,717.1 $ 235.0 14.4 % $ (80.4) (4.7) %
Total pounds of copper
produced(2) 2,133.3 1,886.8 1,874.5 246.5 13.1 % 12.3 0.7 %
Operating cash cost per
pound before byproduct
revenues $ 1.52 $ 1.54 $ 1.49 $ (0.02) (1.3) % $ 0.05 3.4 %
Byproducts per pound
revenues $ (0.64) $ (0.67) $ (0.57) $ 0.03 (4.5) % $ (0.10) 17.5 %
Operating cash cost per
pound net of byproduct
revenues $ 0.88 $ 0.87 $ 0.92 (1) These are non-GAAP measures, see page 91 for reconciliation to GAAP measure.
(2) Net of metallurgical losses.
2019 compared to 2018: As seen in the table above, our per pound cash cost before by-product revenues in 2019 was 1.3% lower when compared with 2018. This decrease was the result of the unit cost effect of 13.1% higher production. Meanwhile, our cash cost per pound when calculated net of by-product revenues for 2019 was 1.1% higher than in the same period of 2018 due to the higher production noted, as well as lower by-product revenues due to the additional copper volume effect. 2018 compared to 2017:
Our cash cost per pound before by-product revenues in 2018 was$1.54 , 3.4% higher than in 2017. This increase in operating cash cost was mainly due to higher production costs, principally at our Peruvian operations. However, our per pound cash cost for 2018, when calculated net of by-product revenues was 5.4% lower than in 2017. This improvement was mainly the result of higher prices for our major by-products.
Metal Prices: The profitability of our operations is dependent on, and our financial performance is significantly affected by, the international market prices for the products we produce, especially for copper, molybdenum, zinc
and
silver.
We are subject to market risks arising from the volatility of copper and other
metals prices. Metal prices historically have been subject to wide fluctuations
and are affected by numerous factors beyond our control. These factors, which
affect each commodity to varying degrees, include international economic and
political conditions, levels of supply and demand, the availability and cost of
substitutes, inventory levels maintained by producers and others and, to a
lesser degree, inventory carrying costs and currency exchange rates. In
addition, the market prices of certain metals have on occasion been subject to
rapid short-term changes due to economic concerns and financial investments.
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For 2020, assuming that expected metal production and sales are achieved, that
2019 tax rates are unchanged and giving no effect to potential hedging programs,
metal price sensitivity factors would indicate the following change in estimated
annual net income attributable to SCC resulting from metal price changes:
Copper Molybdenum Zinc Silver
Change in metal prices (per pound except
silver-per ounce) $ 0.10 $ 1.00 $ 0.10 $ 1.00
Change in net earnings (in millions) $ 140.1 $ 35.1 $ 14.5$ 9.3
Business Segments: We view our Company as having three reportable segments and manage it on the basis of these segments. These segments are (1) our Peruvian operations, (2) our Mexican open-pit operations and (3) our Mexican underground operations, known as our IMMSA unit. Our Peruvian operations include the Toquepala and Cuajone mine complexes and the smelting and refining plants, industrial railroad and port facilities that service both mines. Our Mexican open-pit operations includeLa Caridad andBuenavista mine complexes, the smelting and refining plants and support facilities, which service both mines. Our IMMSA unit includes five underground mines, a coal mine, and several industrial processing facilities. Segment information is included in our review of "Results of Operations" in this item and also in Note 18 "Segment and Related Information" of our consolidated financial statements. Inflation and Exchange Rate Effect of the Peruvian sol and the Mexican peso: Our functional currency is theU.S. dollar and our revenues are primarily denominated inU.S. dollars. Significant portions of our operating costs are denominated in Peruvian sol and Mexican pesos. Accordingly, when inflation and currency devaluation/appreciation of the Peruvian and Mexican currency occur, our operating results can be affected. In recent years, we do believe such changes have not had a material effect on our results and financial position. Please see Item 7A "Quantitative and Qualitative Disclosures about Market Risk" for more detailed information. Capital Investment Program: We made capital investments of$707.5 million in 2019,$1,121.4 million in 2018 and$1,023.5 million in 2017. In general, the capital investments and projects described below are intended to increase production, decrease costs or address social and environmental commitments.
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The table below sets forth our capital investments for the three years ended
2019 2018 2017
Peruvian projects:
Toquepala expansion project $ 41.1 $ 392.4 $ 362.0 Toquepala mine equipment acquisition - - 39.7 Heavy mineral management optimizing project-Cuajone - 17.0 81.7 Ilo 3 substation - 1.0 29.9 HPGR system-Toquepala 7.6 7.8 18.8 Tailings disposal-Quebrada Honda dam 1.0 23.7 15.5 Ilo sulfuric acid plant N°1 modification 5.1 15.3 4.4 Pumping system neutralization plant - Toquepala 8.0
- - Other projects 37.8 24.1 10.0 Subtotal projects 100.6 481.3 562.0 Maintenance and replacement 216.3 201.4 153.1 Net change in capital expenditures incurred but not yet paid 33.2 91.3 (29.7) Total Peruvian expenditures 350.1 774.0 685.4 Mexican projects: New Buenavista concentrator 1.0 5.8 24.7
Buenavista projects infrastructure 1.1
2.3 1.9 Buenavista SXEW plant III - - 1.1 Quebalix IV 0.7 2.0 17.6 New tailing disposal deposit at Buenavista mine 35.8
56.7 79.2
Over elevation of tailings deposit N° 7 at
25.4 18.3 -
-
Solutions system improvements of Tinajas 6.0 1.3 14.5 San Martin mine restoration 48.9 13.5 - Other projects 85.7 63.5 63.0 Subtotal projects 206.4 169.4 202.0 Maintenance and replacement 148.6 169.3 144.7 Net change in capital expenditures incurred but not yet paid 2.4 8.7 (8.6) Total Mexican expenditures 357.4 347.4 338.1 Total capital investments$ 707.5 $ 1,121.4 $ 1,023.5 In 2020, we plan to invest$1,146.7 million in capital projects. In addition to our ongoing capital maintenance and replacement spending, our principal capital programs include the following: Projects in Mexico: Buenavista Zinc-Sonora: This project is located within theBuenavista facility and includes the development of a new concentrator to produce approximately 80,000 tons of zinc and 20,000 tons of copper per year. Currently, we have completed the basic engineering and obtained all environmental permits for the project. The project´s budget is$413 million , and we expect to initiate operations in the third quarter of 2022. When completed, this new facility will double the Company's zinc production capacity and will provide 490 direct jobs and 1,470 indirect jobs. The process of bidding for the site preparation has started and the purchase orders for the major equipment have been placed.Pilares-Sonora : This project, located six kilometers fromLa Caridad , will be developed as an open-pit mine operation with an annual production capacity of 35,000 tons of copper in concentrate. The ore will be transported from the pit to the primary crushers of theLa Caridad copper concentrator through a new 25-meter wide off-road facility for mining trucks, and will significantly improve the over-all mineral ore grade (combining the 0.78% expected fromPilares with 0.34% fromLa Caridad ). The budget forPilares is$159 million and we expect it to start production during the first half of 2022. The connection road betweenPilares mine andLa Caridad mine is now under construction. 73 Table of ContentsEl Pilar - Sonora: This is a low capital intensity copper greenfield project strategically located inSonora, Mexico , approximately 45 kilometers from ourBuenavista mine. Its copper oxide mineralization contains estimated proven and probable reserves of 325 million tons of ore with an average copper grade of 0.287%.El Pilar will operate as a conventional open-pit mine and copper cathodes will be produced using the highly cost efficient and environmentally friendly SX-EW technology. We estimate a development investment of approximately$310 million . The construction of the pilot plant is finished and the production tests have recently begun. We expect this project to start production during 2023. TheSan Martin mine restoration program: After eleven years of an illegal stoppage, we resumed control of theSan Martin mine inAugust 2018 . TheSan Martin facilities deteriorated during this period and we undertook a major renovation in order to restart operations during the second quarter of 2019. Currently, the mine has 200,000 tons of ore and the concentrator has initiated production. In 2019, we produced 5,837 tons of zinc, 1.2 million ounces of silver and 1,335 tons of copper. The budget of the restoration program is$97.7 million . AtDecember 31, 2019 the program had a total expense of$73.6 million . Projects inPeru :
Our main capital projects in
Toquepala Expansion Project - Tacna: This$1,320 million project includes a new state-of-the-art concentrator which increased Toquepala's annual copper production to 258,000 tons in 2019, a 51.5% production increase, when compared to 2018. As ofDecember 31, 2019 , we have invested$1,280.1 million in this expansion. Construction of the project was completed and production began in the fourth quarter of 2018. Full production was reached in the second quarter of 2019. The project to improve the crushing process at Toquepala with the installation of a High Pressure Grinding Roll (HPGR) system, has as its main objective, to ensure that our existing concentrator will operate at its maximum annual production capacity of 117,000 tons of copper while reducing operating costs through ore crushing efficiencies, even with an increase of the ore material hardness index. The budget for this project is$52 million and as ofDecember 31, 2019 , we have invested$51.9 million . We are in the administrative close-out process for this project, which was added to operations during the fourth quarter of 2018. Cuajone tailing thickeners project - Moquegua: This project will replace two of the three existing thickeners at the concentrator with a new hi-rate thickener. The purpose is to streamline the concentrator flotation process and improve water recovery efficiency, increasing the tailings solids content from 54% to 61%, thereby reducing fresh water consumption and replacing it with recovered water. As ofDecember 31, 2019 , we have invested$31 million out of the approved budget of$31.3 million in this project. This project was finished inOctober 2019 .
Tailings disposal at Quebrada Honda - Moquegua: This project increases the height of the existing Quebrada Honda dam to impound future tailings from the Toquepala and Cuajone concentrators and will extend the expected life of this tailings facility by 25 years. The first stage and construction of the drainage system for the lateral dam is finished. We finished the second stage with the installation of a new cyclone battery station that allows us to place more slurry at the dams. We are evaluating improvements in operational processes of this facility. The project has a total budgeted cost of$116 million and we have invested$107.2 million throughDecember 31, 2019 . Potential projects: We have a number of other projects that we may develop in the future. We continuously evaluate new projects on the basis of our long-term corporate objectives, strategic and operating fit, expected return on investment, required investment, estimated production, estimated cash-flow profile, social and environmental considerations, among other factors. All capital spending plans will continue to be reviewed and adjusted to respond to changes in the economy or market conditions. We are currently developing a new organic growth plan to increase our annual copper production to 1.5 million tons by 2028 with the development of new projects, which include the following: 74 Table of Contents
El Arco -Baja California : This is a world class copper deposit located in the central part of theBaja California peninsula, with ore reserves of over 2.7 billion tons with an ore grade of 0.399% and 0.11 grams of gold per ton. This project, includes an open-pit mine combining concentrator and SX-EW operations with an estimated production of 190,000 tons of copper and 105,000 ounces of gold annually. We are currently in the land acquisition process for the project.Tia Maria - Arequipa: OnJuly 8, 2019 , we received the construction permit for this 120,000 ton annual SX-EW copper greenfield project with a total capital budget of$1,400 million . This permit was obtained after completing an exhaustive review process of environmental and social matters, complying with all established regulatory requirements and addressing all observations raised.
The challenges to the construction permit were overcome when on
In coordination with the Peruvian Government,Southern Copper continues to work on common grounds for dialogue with the neighboring communities to address any concerns they may have on the project and is awaiting the proper economic and political conditions to move ahead with the project. Meanwhile, we reiterate our commitment to delay the construction of the project. We guarantee to the population of Islay that the Tia Maria project will not adversely affect other local economic activities because we will use desalinated seawater for our operations and, for the transport of our supplies and copper production, we will build a 32 kilometer industrial railway and an access road at a safe distance from theTambo Valley . Our social programs in education, healthcare and productive development will continue to improve the quality-of-life, and the agricultural and livestock activities in theTambo Valley , as well as fishing and tourism in Islay. During the construction and operation phase, hiring local labor will be a priority. For this purpose, we have successfully launched inJune 2019 , the free technical training program "Forging the Future", which will benefit 700 persons in this province in 2019-20. After training, the participants will be eligible to apply for one of the estimated 9,000 jobs (3,600 direct and 5,400 indirect) required during the Tia Maria construction phase. We believe that the initiation of construction activities forTia Maria will generate significant economic opportunities for the Islay province and the Arequipa region. When in operation, we expectTia Maria will generate a significant contribution through mining royalties and taxes from day-one and will directly employ 600 workers and indirectly provide jobs for another 4,200 workers. This greenfield project, located in Arequipa,Peru , will use state of the art SX-EW technology with the highest international environmental standards. SX-EW facilities are the most environmentally friendly in the industry due to their technical process with no emissions released into the atmosphere. Los Chancas-Apurimac: This greenfield project, located in Apurimac,Peru , is a copper and molybdenum porphyry deposit. Current estimates indicate the presence of 545 million tons of mineralized material with a copper content of 0.59%, molybdenum content of 0.04% and 0.039 grams of gold per ton, as well as 181 million tons of mineralized leachable material with a total copper content of 0.357%.Los Chancas project envisions an open-pit mine with a combined operation of concentrator and SX-EW processes to annually produce 130,000 tons of copper and 7,500 tons of molybdenum. The estimated capital investment is$2,800 million and is expected to be in operation in 2026. In 2018 and 2019, we developed social and environmental improvement programs for the local communities. For 2020, we plan to continue with these activities and to conclude the environmental impact assessment of the project. Michiquillay Project-Cajamarca: OnJune 12, 2018 ,Southern Copper signed a contract and made an initial payment of$12.5 million for the acquisition of the Michiquillay project in Cajamarca,Peru . The Company has created a multidisciplinary management team to plan the development of this project. As part of this plan, the Company has established contact with the local authorities and communities in order to promote programs for the sustainable development of the area. In 2019, we developed social and environmental programs for the local communities and began a semi-detailed environmental impact assessment. This will allow us to begin a 40,000 meter diamond drilling program in 2020, to verify and update the estimated mineralized materials of the project. 75 Table of Contents Michiquillay is a world class mining project with estimated mineralized material of 1,150 million tons with an estimated copper grade of 0.63%. When developed, we expect Michiquillay to produce 225,000 tons of copper per year (along with by-products of molybdenum, gold and silver) for an initial mine life of more than 25 years, at a competitive cash-cost. We estimate an investment of approximately$2.5 billion will be required and expect production start-up by 2026, with Michiquillay becoming one of Peru´s largest copper mines. The project will create significant business opportunities in the Cajamarca region, generate new jobs for the local communities and contribute with taxes and royalties to the national, regional and local governments. The above information is based on estimates only. We cannot make any assurances that we will undertake any of these projects or that the information noted
is accurate.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our significant accounting policies are discussed in Note 2 "Summary of Significant Accounting Policies" of the Notes to Consolidated Financial Statements, included in Item 8 "Financial Statements and Supplementary Data" of this Annual Report.
Our discussion and analysis of financial condition and results of operations, as well as quantitative and qualitative disclosures about market risks, are based upon our consolidated financial statements, which have been prepared in accordance withU.S. GAAP. Preparation of these consolidated financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We make our best estimate of the ultimate outcome for these items based on historical trends and other information available when the financial statements are prepared. Changes in estimates are recognized in accordance with the accounting rules for the estimate, which is typically in the period when new information becomes available to management. Areas where the nature of the estimate makes it reasonably possible that actual results could materially differ from amounts estimated include: ore reserves, revenue recognition, ore stockpiles on leach pads and related amortization, estimated impairment of assets, asset retirement obligations, determination of discount rates related to the operating lease liabilities, valuation allowances for deferred tax assets and unrecognized tax benefits. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. Ore Reserves: For internal ore reserve estimation, we use metal price assumptions of$2.90 per pound for copper and$7.50 per pound for molybdenum. These prices are intended to conservatively approximate average prices over
the long term. However, pursuant toSEC guidance, the reserve information in this report is calculated using average metals prices over the most recent three years, except as otherwise stated. We refer to these three-year average metals prices as "current average prices." Our current average prices for copper are calculated using prices quoted by COMEX, and our current average prices for molybdenum are calculated using prices published in Platt's Metals Week. Unless otherwise stated, reserve estimates in this report use the following three years average prices for copper and molybdenum as ofDecember 31, 2019 : Average 2019 2018 2017 2019 - 2017 Copper ($per pound)$ 2.72 $ 2.93 $ 2.80 $ 2.82 Molybdenum ($per pound)$ 11.35 $ 11.94 $ 8.21 $ 10.50 Certain financial information is based on reserve estimates calculated on the basis of current average prices. These include amortization of intangible assets and mine development. Variations in ore reserve calculations from changes in metal price assumptions generally do not create material changes to our financial results. However, significant decreases in metal prices could adversely affect our earnings by causing, among other things, asset impairment charges, please see "Assets impairment" below. A 20% increase or decrease in three-year average copper prices (current prices), for mineral reserves estimation, which is a reasonable possibility, would not materially affect our statement of earnings as the amount of reserves would not change significantly. Please see Item 2 "Properties-Ore reserves." 76 Table of Contents Ore stockpiles on leach pads: The leaching process is an integral part of the mining operations carried out at our open-pit mines. We capitalize the production cost of leachable material at our Toquepala,La Caridad andBuenavista mines recognizing it as inventory. The estimates of recoverable mineral content contained in the leaching dumps are supported by engineering studies. As the production cycle of the leaching process is significantly longer than the conventional process of concentrating, smelting and electrolytic refining, we include on our balance sheet, current leach inventory (as part of work-in-process inventories) and long-term leach inventory. Amortization of leachable material is recorded by the units of production method. Asset Retirement Obligation: Our mining and exploration activities are subject to various laws and regulations governing the protection of the environment. Accounting for reclamation and remediation obligations requires management to make estimates unique to each mining operation of the future costs we will incur to complete the reclamation and remediation work required to comply with existing laws and regulations. These estimates are based in part on our inflation and credit rate assumptions. Actual costs incurred in future periods could differ from amounts estimated. Additionally, future changes to environmental laws and regulations could increase the extent of reclamation and remediation work required to be performed by us. Any such increases in future costs could materially impact the amounts charged to operations for reclamation and remediation.
Asset retirement obligations are further discussed in Note 10 "Asset Retirement Obligation" to our consolidated financial statements included herein.
Revenue Recognition: For certain of our sales of copper and molybdenum products, customer contracts allow for pricing based on a month subsequent to shipping, in most cases within the following three months and in few cases perhaps a few further months. In such cases, revenue is recorded at a provisional price at the time of shipment. The provisionally priced copper sales are adjusted to reflect forward LME or COMEX copper prices at the end of each month until a final adjustment is made to the price of the shipments upon settlement with customers pursuant to the terms of the contract. In the case of molybdenum sales, for which there are no published forward prices, the provisionally priced sales are adjusted to reflect the market prices at the end of each month until a final adjustment is made to the price of the shipments upon settlement with customers pursuant to the terms of the contract. (See details in "Provisionally Priced Sales" under this Item 7). Income Taxes: In preparing our consolidated financial statements, we recognize income taxes in each of the jurisdictions in which we operate. For each jurisdiction, we calculate the actual amount currently payable or receivable, as well as deferred tax assets and liabilities attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in rate is recognized through the income tax provision in the period
that the change is enacted. A valuation allowance is provided for those deferred tax assets for which it is more likely than not that the related benefits will not be realized. In determining the amount of the valuation allowance, we consider estimated future taxable income, as well as feasible tax planning strategies in each jurisdiction. If we determine that we will not realize all or a portion of our deferred tax assets, we will increase our valuation allowance with a charge to income tax expense. Conversely, if we determine that we will ultimately be able to realize all or a portion of the related benefits for which a valuation allowance has been provided, all or a portion of the related valuation allowance will be reduced with a credit to income tax expense. Our Company's operations involve dealing with uncertainties and judgments in the application of complex tax regulations in multiple jurisdictions. The final taxes paid are dependent upon many factors, including negotiations with taxing authorities in various jurisdictions and resolution of disputes arising from federal, state, and international tax audits. We recognize potential liabilities and record tax liabilities for anticipated tax audit issues in theU.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due. We follow the guidance of ASC 740 "Income Taxes" to record these liabilities. (See Note 7 "Income Taxes" of the consolidated financial statements for additional information). We adjust these reserves in light of changing facts and circumstances; however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is 77 Table of Contents materially different from our current estimate of the tax liabilities. If our estimate of tax liabilities proves to be less than the ultimate assessment, an additional charge to expense would result. If payment of these amounts ultimately proves to be less than the recorded amounts, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary. We recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense. OnDecember 22, 2017 , the President ofthe United States signed into law the Tax Cuts and Jobs Act ("the TCJA"). The Act significantly changesU.S. tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. The TCJA permanently reduced theU.S. corporate income tax rate from a maximum of 35% to a flat 21% effectiveJanuary 1, 2018 . TheSEC staff issued Staff Accounting Bulletin No. 118 ("SAB 118") to address the application ofU.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the TCJA. In 2017, the Company recognized the provisional tax impacts related to deemed repatriated earnings and the revaluation of deferred tax assets and liabilities and included these amounts in its consolidated financial statements for the year endedDecember 31, 2017 . In the consolidated financial statements for the year endedDecember 31, 2018 , the Company completed the accounting for income tax effects of the TCJA in accordance withSAB 118. For further information, see Note 7 "Income Taxes", of our consolidated financial statements. Asset Impairments: We evaluate our long-term assets when events or changes in economic circumstances indicate that the carrying amount of such assets may not be recoverable. Our evaluations are based on business plans that are prepared using a time horizon that is reflective of our expectations of metal prices over our business cycle. We are currently using an average copper price of$2.20 per pound and an average molybdenum price of$5.00 per pound, reflective of what we believe is the lower level of the current price environment, for our impairment tests. The results of our impairment sensitivity analysis, which included a stress test using a copper price assumption of$2.00 per pound and a molybdenum price assumption of$4.00 per pound showed projected discounted cash flows in excess of the carrying amounts of long-lived assets by margins ranging from 1.2 to 4.8 times such carrying amount. In recent years our assumptions for long-term average prices resulted in stricter evaluations for impairment analysis than using the three year average prices for copper and molybdenum prices. Should this situation reverse in the future with three year average prices below the long-term price assumption, we would assess the need to use the three year average prices in our evaluations. We use an estimate of the future undiscounted net cash flows of the related asset or asset group over the remaining life to measure whether the assets are recoverable and measure any impairment by reference to fair value. Leases: In 2019, the Company adopted the new leases standard and it resulted in the recognition of right-of-use assets and lease obligations on the Company´s balance sheet. After the analysis of this standard, the Company concluded that all of its existing lease contracts are operating lease contracts. Right-of-use assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent an obligation by the Company to make lease payments which arise from the lease. Lease right-of-use assets and liabilities are recognized at the inception date based on the present value of lease payments over the lease term. As the Company's lease contracts do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the inception date in order to determine the present value of lease payments. 78 Table of Contents RESULTS OF OPERATIONS
The following table highlights key financial results for each of the years in
the three-year period ended
Variance
Statement of Earnings Data 2019 2018 2017 2019 - 2018 2018 - 2017
Net sales $ 7,285.6 $ 7,096.7 $ 6,654.5 $ 188.9 $ 442.2
Operating costs and expenses (4,532.6) (4,215.5) (4,035.6) (317.1) (179.9)
Operating income 2,753.0 2,881.2 2,618.9 (128.2) 262.3
Nonoperating income (expense) (326.5) (291.8) (316.2) (34.7) 24.4
Income before income taxes 2,426.5 2,589.4 2,302.7 (162.9) 286.7
Income taxes (966.3) (1,105.0) (951.7) 138.7 (153.3)
Deferred income taxes 21.0 51.5 (641.7) (30.5) 693.2
Equity earnings of affiliate 10.7 12.3 23.1 (1.6) (10.8)
Net income attributable to
noncontrolling interest (6.1) (5.2) (3.9) (0.9) (1.3)
Net income attributable to SCC
NET SALES 2019-2018: Net sales in 2019 were$7,285.6 million , compared to$7,096.7 million in 2018, an increase of$188.9 million . This 2.7% increase was mainly the result of higher copper (+11.3%), molybdenum (+21.7%) and silver (+5.7%) sales volumes, partially offset by copper (-8.1%) and molybdenum (-5.0%) prices. 2018-2017: Net sales in 2018 were$7,096.7 million , compared to$6,654.5 million in 2017, an increase of$442.2 million . This 6.6% increase was principally the result of higher copper (+5.7%) and molybdenum (+45.9%) prices and higher sales volumes of silver (+15.3%) and molybdenum (+3.3%), partially offset by lower silver price (-8.1%) and lower zinc sales volume (-1.0%). The table below outlines the average published market metals prices for our metals for each of the three years in the three-year period endedDecember 31, 2019 : % Variance 2019 2018 2017 2019 - 2018 2018 - 2017 Copper price ($per pound-LME)$ 2.72 $ 2.96 $ 2.80 (8.1) % 5.7 %
Copper price ($per pound-COMEX)$ 2.72 $ 2.93 $ 2.80 (7.2) % 4.6 % Molybdenum price ($per pound)(1)$ 11.27 $ 11.86 $ 8.13 (5.0) % 45.9 % Zinc price ($per pound-LME)$ 1.16 $ 1.33 $ 1.31 (12.8) % 1.5 % Silver price ($per ounce-COMEX)$ 16.16 $ 15.65 $ 17.03
3.3 % (8.1) %
(1) Platt's Metals Week Dealer Oxide.
The table below provides our metal sales as a percentage of our total net sales:
Year Ended
December 31,
Sales as a percentage of total net sales 2019 2018 2017
Copper 80.2 % 80.4 % 82.3 %
Molybdenum 7.5 % 7.2 % 5.3 %
Silver 4.5 % 4.2 % 4.3 %
Zinc 3.8 % 4.6 % 4.9 %
Other byproducts 4.0 % 3.6 % 3.2 %
Total 100.0 % 100.0 % 100.0 %
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The table below provides our copper sales by type of product (in million
pounds):
Variance
Copper Sales (million pounds) 2019 2018 2017 2019 - 2018 2018 - 2017
Refined (including SXEW) 1,065.2 1,152.2 1,193.3 (87.0) (41.1)
Rod 365.5 335.7 309.7 29.8 26.0
Concentrates and other 743.1 465.0 456.2 278.1 8.8
Total 2,173.8 1,952.9 1,959.2 220.9 (6.3)
The table below provides our copper sales volume by type of product as a percentage of our total copper sales volume:
Year ended December 31,
Copper Sales by product type 2019 2018 2017
Refined (including SXEW) 49.0 % 59.0 % 60.9 %
Rod 16.8 % 17.2 % 15.8 %
Concentrates and other 34.2 % 23.8 % 23.3 %
Total 100.0 % 100.0 % 100.0 %
OPERATING COSTS AND EXPENSES
The table below summarizes the production cost structure by major components for the three years ended 2019 as a percentage of total production cost:
Year ended December 31,
2019 2018 2017
Power 14.7 % 14.8 % 16.8 %
Labor 13.9 % 13.9 % 13.9 %
Fuel 13.2 % 14.6 % 13.7 %
Maintenance 21.0 % 19.5 % 18.9 %
Operating material 17.7 % 18.7 % 19.3 %
Other 19.5 % 18.5 % 17.4 %
Total 100.0 % 100.0 % 100.0 %
2019-2018: Operating costs and expenses in 2019 increased
Operating cost and expenses for 2018
Plus:
• Higher cost of sales (exclusive of depreciation, amortization and
depletion) mainly due to lower capitalized leachable material,
higher repairing materials costs, operating contractors and power
costs, partially offset by lower cost of metals purchased from
third parties and lower inventory consumption. 197.4• Higher depreciation, amortization and depletion expense due to our
expansion and maintenance investments. 90.1
• Higher selling, general and administrative expenses.
29.2
• Higher exploration expense.
0.4
Operating cost and expenses for 2019$ 4,532.6 80 Table of Contents
2018-2017: Operating costs and expenses in 2018 increased
Operating cost and expenses for 2017
Plus:
• Higher cost of sales (exclusive of depreciation, amortization and
depletion) mainly due to higher inventory consumption, foreign
currency transaction effect, higher workers' participation
expense and higher fuel costs, partially offset by lower power
costs, and higher capitalized ore stockpiles on leach pads. 156.2
• Reversal in 2017 of over-accrual of
costs. 10.2
• Higher selling, general and administrative expenses. 9.5 • Higher depreciation, amortization and depletion expense. 3.2 • Higher exploration expense. 0.8
Operating cost and expenses for 2018
$ 4,215.5 Variance
NONOPERATING INCOME (EXPENSE) 2019 2018
2017 2019 - 2018 2018 - 2017 Interest expense$ (372.9) $ (360.9) $ (357.4) $ (12.0) $ (3.5) Capitalized interest 32.2 83.8 51.4 (51.6) 32.4 Other expense (7.0) (30.7) (15.7) 23.7 (15.0) Interest income 21.2 16.0 5.5 5.2 10.5
Total nonoperating income (expense)
(316.2)$ (34.7) $ 24.4 2019-2018: Non-operating income and expense were a net expense of$326.5 million in 2019 compared to a net expense of$291.8 million in 2018. The$34.7 million increase in net expense in 2019 was mainly due to:
?
have been transferred to operations.
?
issuance in
operations, and
?
2018-2017: Non-operating income and expense were a net expense of$291.8 million in 2018 compared to a net expense of$316.2 million in 2017. The$24.4 million decrease in net expense in 2018 was mainly due to:
?
investments at our Peruvian operations,
?
?
of certain non-capital expenses related to the Tia Maria project; and
?
Income taxes
Year Ended
December 31,
2019 2018 2017
Provision for income taxes ($ in millions)
39.0 % 40.7 % 69.2 %
The income tax provision includes Peruvian, Mexican and
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Components of income tax provision for 2019, 2018 and 2017 include the following ($ in millions):
2019 2018 2017
Statutory income tax provision $ 831.4 $ 903.4 $ 688.5
Tax reform adjustment - 30.9 785.9
Peruvian royalty 14.2 9.0 2.5
Mexican royalty 61.6 79.6 93.2
Peruvian special mining tax 38.1 30.6 23.3
Total income tax provision $ 945.3 $ 1,053.5 $ 1,593.4
The decrease in the effective tax rate in 2019 from the prior year was primarily
due to permanent differences in the Mexican tax jurisdiction, including a
decrease in inflationary tax components of 0.7 percentage points and a decrease
in special mining tax of 0.6 percentage points.
The decrease in the effective tax rate in 2018 from the prior year was due to the following changes (in percentage points):
Effective income tax rate for 2017
69.2 %
Change in valuation of 2017 deferred tax assets for foreign tax
credits,
(25.9)
Reduction of corporate tax rate applied to 2017 U.S. deferred tax asset
(4.9)
Change in 2017 transition tax on repatriated foreign earnings
(2.0)
Additional valuation allowance on 2018 U.S. deferred tax assets, foreign tax credits and US tax effect of Peruvian deferred taxes
7.5 Permanent Differences (4.8) Other changes 1.6
Effective income tax rate for 2018
40.7 % In 2018, the Company completed its evaluation of the effects of the 2017 U.S, tax reform and recorded a non-cash tax provision of$30.9 million in addition to the non-cash amount of$785.9 million recorded in 2017. This brings the total recorded effect of the 2017 U.S. tax reform on the Company's financial statements for 2017 and 2018 to a non-cash tax provision of$816.8 million .
Equity earnings of affiliate
In 2019, 2018 and 2017 we have recognized
Net Income attributable to the non-controlling interest
Net income attributable to the non-controlling interest in 2019 was$6.1 million , compared to$5.2 million in 2018, and$3.9 million in 2017. It increased in 2019 and 2018 by$0.9 million and$1.3 million , respectively. These changes were the result of higher earnings at our Peruvian operations in both years. Income attributable to SCC Our net income attributable to SCC in 2019 was$1,485.8 million , compared to$1,543.0 million in 2018 and$728.5 million in 2017. Net income attributable to SCC decreased mainly due to increases in cost of sales and depreciation, amortization and depletion. The increase in 2018 net income was mainly due to higher sales and lower taxes as the 2017 financial results included the one-time, non-cash income tax adjustment of$785.9 million recorded in 2017 as a result of theU.S. income tax legislation enacted in the fourth quarter of
2017.
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SEGMENT RESULTS ANALYSIS
We have three segments: the Peruvian operations, the Mexican open-pit operations and the Mexican underground mining operations. Please see a detailed definition of these segments in Item 1 "Business-Business Reporting Segments." The following table presents the volume of sales by segment of copper and our significant by-products, for each of the years in the three-year period endedDecember 31, 2019 : Variance Copper Sales (million pounds) 2019 2018 2017 2019 - 2018 2018 - 2017 Peruvian operations 959.3 759.4 710.1 199.9 49.3 Mexican openpit 1,214.0 1,193.6 1,249.1 20.4 (55.5) Mexican IMMSA unit 18.7 19.0 15.5 (0.3) 3.5
Other and intersegment elimination (18.2) (19.0) (15.5)
0.8 (3.5)
Total copper sales 2,173.8 1,953.0 1,959.2 220.8 (6.2)
Variance
Byproduct Sales (million pounds,
except silver-million ounces) 2019 2018 2017 2019 - 2018 2018 - 2017
Peruvian operations:
Molybdenum contained in concentrate 23.2 16.0 17.5 7.2 (1.5)
Silver 5.8 4.5 4.1 1.3 0.4
Mexican openpit operations:
Molybdenum contained in concentrate 36.0 32.6 29.6 3.4 3.0
Silver 11.5 11.3 10.1 0.2 1.2
IMMSA unit
Zincrefined and in concentrate 228.5 234.8 237.2 (6.3) (2.4)
Silver 5.2 5.5 4.3 (0.3) 1.2
Other and intersegment elimination
Silver (1.9) (1.9) (1.6) - (0.3)
Total byproduct sales
Molybdenum contained in concentrate 59.2 48.6 47.1 10.6 1.5
Zincrefined and in concentrate 228.5 234.8 237.2
(6.3) (2.4)
Silver 20.6 19.4 16.9 1.2 2.5
Peruvian Open-pit Operations:
Variance
2019 2018 2017 2019 - 2018 2018 - 2017
Net sales $ 2,940.1 $ 2,572.2 $ 2,244.1 $ 367.9 $ 328.1
Operating costs and expenses (2,085.2) (1,802.0) (1,617.0)
(283.2) (185.0)
Operating income $ 854.9 $ 770.2 $ 627.1 $ 84.7 $ 143.1
Net sales:
2019-2018: Net sales in 2019 increased by
2018-2017: Net sales in 2018 increased by
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Operating costs and expenses:
2019-2018: Operating costs and expenses in 2019 increased by
Operating cost and expenses for 2018
Plus:
• Higher cost of sales (exclusive of depreciation, amortization and
depletion) mainly due to higher repairing materials costs,
operating contractors, power costs and higher workers'
participation expense; partially offset by lower inventory
consumption and lower fuel costs. 192.7• Higher depreciation, amortization and depletion expense due to our
expansion and maintenance investments. 90.7
• Higher selling, general and administrative expenses.
1.8
Less:
• Lower exploration expenses.
(2.0)
Operating cost and expenses for 2019
$ 2,085.2
2018-2017: Operating costs and expenses in 2018 increased by
Operating costs and expenses for 2017
Plus:
• Higher cost of sales (exclusive of depreciation, amortization and
depletion) mainly due to higher inventory consumption, higher fuel
costs and higher workers' participation expense; partially offset
by lower cost of metals purchased from third parties and lower
power costs. 146.6• Higher depreciation, amortization and depletion expense due to our
expansion and maintenance investments. 33.8
• Higher exploration expenses.
4.1
• Higher selling, general and administrative expenses.
0.5
Operating costs and expenses for 2018
$ 1,802.0
Mexican Open-pit Operations:
Variance
2019 2018 2017 2019 - 2018 2018 - 2017
Net sales $ 3,963.9 $ 4,075.9 $ 3,972.7 $ (112.0) $ 103.2
Operating costs and expenses (2,045.4) (2,028.7) (2,035.7) (16.7) 7.0
Operating income $ 1,918.5 $ 2,047.2 $ 1,937.0 $ (128.7) $ 110.2
Net sales:
2019-2018: Net sales in 2019 decreased by
2018-2017: Net sales in 2018 increased by
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Operating costs and expenses:
2019-2018: Operating costs and expenses in 2019 increased by
Operating costs and expenses for 2018 $
2,028.7
Plus:
• Higher selling, general and administrative expenses.
23.3
• Higher cost of sales (exclusive of depreciation, amortization and
depletion) mainly due to lower capitalized leachable material and
higher power costs, largely offset by a lower cost of metals
purchased from third parties.
2.1
Less:
• Lower depreciation, amortization and depletion expense.
(8.5)
• Lower exploration expenses.
(0.2)
Operating costs and expenses for 2019 $
2,045.4
2018-2017: Operating costs and expenses in 2018 decreased by
Operating costs and expenses for 2017 $
2,035.7
Less:
• Lower depreciation, amortization and depletion expense.
(40.6)
• Lower exploration expenses.
(0.7)
Plus:
• Higher cost of sales (exclusive of depreciation, amortization and
depletion) mainly due to lower cost of metals purchased from third parties and higher sales expenses; partially offset by lower inventory consumption and lower power costs. 16.7 Reversal in 2017 of over-accrual ofSonora River remediation • costs.
10.2
• Higher selling, general and administrative expenses.
7.4
Operating costs and expenses for 2018 $
2,028.7
IMMSA unit:
pa
Variance
2019 2018 2017 2019 - 2018 2018 - 2017
Net sales $ 464.8 $ 527.9 $ 508.7 $ (63.1) $ 19.2
Operating costs and expenses (449.5) (438.6) (434.9) (10.9) (3.7)
Operating income $ 15.3 $ 89.3 $ 73.8 $ (74.0) $ 15.5
Net sales:
2019-2018: Net sales in 2019 decreased
2018-2017: Net sales in 2018 increased
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Operating costs and expenses:
2019-2018: Operating costs and expenses in 2019 increased by
Operating costs and expenses for 2018 $
438.6
Plus:
• Higher depreciation, amortization and depletion expense. 4.7
• Higher exploration expenses. 3.8
• Higher cost of sales (exclusive of depreciation,
amortization and depletion) mainly due to higher inventory
consumption and higher repairing materials costs,
partially offset by lower cost of metals purchased from
third parties. 3.0
Less:
• Lower selling, general and administrative expenses. (0.6)Operating costs and expenses for 2019 $
449.5
2018-2017: Operating costs and expenses in 2018 increased
Operating costs and expenses for 2017 $
434.9
Plus:
• Higher cost of sales (exclusive of depreciation,
amortization and depletion) mainly due to higher power
costs and higher workers' participation expense; partially
offset by lower cost of metals purchased from third
parties and foreign currency effect. 11.9
• Higher selling, general and administrative expenses. 0.6Less:
• Lower depreciation, amortization and depletion expense.
(8.6)
• Lower exploration expenses.
(0.2)
Operating costs and expenses for 2018 $
438.6
Intersegment Eliminations and Adjustments:
The net sales, operating costs and expenses and operating income discussed above will not be directly equal to amounts in our consolidated statement of earnings because the adjustments of intersegment operating revenues and expenses must be taken into account. Please see Note 18 "Segment and Related Information" of our consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
The following discussion relates to our liquidity and capital resources for each
of the years in the three year period ended
Cash Flow:
The following table shows the cash flow for the three year period ended
Variance
2019 2018 2017 2019 - 2018 2018 - 2017Net cash provided by operating activities$ 1,911.9 $ 2,235.1 $ 1,976.6 $ (323.2) $ 258.5 Net cash used in investing activities$ (574.0) $ (1,296.2) $ (1,019.0) $ 722.2 $ (277.2) Net cash used in financing activities$ (262.2) $ (1,083.4) $
(456.1)$ 821.2 $ (627.3) 86 Table of Contents
Net cash provided by operating activities:
The 2019, 2018 and 2017 change in net cash from operating activities include (in
millions):
Variance
2019 2018 2017 2019 - 2018 2018 - 2017
Net income $ 1,491.9 $ 1,548.2 $
732.4
90.1 3.2
Provision (benefit) for deferred income
taxes (21.0) (51.5) 641.5 30.5 (693.0)
Loss (gain) on foreign currency
transaction effect 17.9 17.3 24.9 0.6 (7.6)
Other adjustments to net income 5.7 23.1 (3.4) (17.4) 26.5
Operating assets and liabilities (347.0) 23.7 (89.9) (370.7) 113.6
Net cash provided by operating activities
Significant items added to (deducted from) net income to arrive at operating cash flow include depreciation, amortization and depletion, deferred tax amounts and changes in operating assets and liabilities. In 2017, we recorded a non-cash tax charge of$785.9 million related to theU.S. tax law change enacted inDecember 2017 .
2019: Net income was
result of higher earnings at our Mexican and Peruvian operations in 2018.
?
sales volumes at our Peruvian operations.
at our Mexican operations.
to changes in tax legislation.
2018: Net income was
?
?
offset by
?
2017: Net income was$732.4 million , approximately 37% of the net cash provided from operating activities. A net increase in operating assets and liabilities decreased operating cash flow by$89.9 million and included:
?
for our operations and
offset by
accrued workers' participation and
use of tax credits from previous years.
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Net cash used in investing activities:
2019: Net cash used for investing activities in 2019 included$707.5 million for capital investments. These included$357.4 million of investments at our Mexican operations and$350.1 million of investments at our Peruvian operations. For further information, please see "Capital Investment Program" under this Item on page 73.
The 2019 investing activities also include net sales of short-term investments
of
2018: Net cash used for investing activities in 2018 included$1,121.4 million for capital investments. These included$347.4 million of investments at our Mexican operations and$774.0 million of investments at our Peruvian operations. For further information, please see "Capital Investment Program" under this Item on page 73.
The 2018 investing activities also include net purchases of short-term
investments of
2017: Net cash used for investing activities in 2017 included$1,023.5 million for capital investments. These included$338.1 million of investments at our Mexican operations and$685.4 million of investments at our Peruvian operations. For further information, please see "Capital Investment Program" under this Item on page 73.
The 2017 investing activities also include net sales of short-term investments
of
Net cash used in financing activities:
2019: Net cash used in financing activities in 2019 was
? A dividend distribution of
? Gross proceeds of
Mexican subsidiary.
? Payment of debt issuance costs of
2018: Net cash used in financing activities in 2018 was
2017: Net cash used in financing activities in 2017 was
Other Liquidity Considerations
We expect that we will meet our cash requirements for 2020 and beyond from cash on hand and internally generated funds. In addition, we believe that we will be able to access additional external financing on reasonable terms, if required. As ofDecember 31, 2019 ,$1,106.7 million of the Company´s total cash, cash equivalents, restricted cash and short-term investments of$2,005.8 million were held by foreign subsidiaries. The cash, cash equivalents and short-term investments maintained in our foreign operations are generally used to cover local operating and investment expenses. AtDecember 31, 2017 ,Minera Mexico had determined that it had earnings available for dividends tothe United States of$555.5 million . The 2017 U.S. tax reform introduced a one-time transition tax that is based upon the higher of the Company's total accumulated post-1986 deferred income as ofNovember 2, 2017 orDecember 31, 2017 , estimated to be$8.9 billion , the majority of which was previously considered to be indefinitely reinvested and accordingly, noU.S. federal and state income taxes were provided. During 2018, the Company finalized its transition tax at$153.1 million , which was fully offset by foreign tax credits. Upon enactment of the 2017 U.S. tax reform, the Company had calculated and recorded in 2017 a provisional amount of$181.1 million and reduced it by$28 million in 2018 when the calculation was finalized. Earnings of the Company's Peruvian branch are not subject to transition taxes since they are taxed inthe United States on a
current basis.
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Share repurchase program: In 2008, our Board of Directors ("BOD") authorized a
$500 million share repurchase program that has since been increased by the BOD
and is currently authorized to $3 billion . Since the inception of the program
through December 31, 2018 , we have purchased 119.5 million shares of our common
stock at a cost of $2.9 billion . These shares are available for general
corporate purposes. We may purchase additional shares of our common stock from
time to time based on market conditions and other factors. This repurchase
program has no expiration date and may be modified or discontinued at any time.
For further details please see Item 5 "Market for Registrant's Common Equity,
Related Stockholder Matters and Issuer Purchases of Equity Securities-SCC common
stock repurchase plan."
Dividend: OnFebruary 20, 2020 , the BOD authorized a dividend of$0.40 per share to be paid onMarch 24, 2020 , to shareholders of record at the close of business onMarch 10, 2020 . FINANCING
Our total debt at
The ratio of total debt to total capitalization was 50.2% atDecember 31, 2019 , compared to 47.4% atDecember 31, 2018 . In addition, the ratio of net debt to net capitalization was 41.8% atDecember 31, 2019 , compared to 42.6% atDecember 31, 2018 . We define net debt as total debt, including current maturities, minus cash, cash equivalents and short-term investments balance. We believe that net debt is useful to investors as a measure of our financial position. We define net capitalization as the sum of net debt and equity. We use the net debt to net capitalization ratio as measure of our indebtedness position and to determine how much debt we can take in addition to the use of the equity and the balance sheet in general. We define total capitalization as the sum of the carrying values of our total debt, including current maturities, and equity. A reconciliation of our net debt to net capitalization and total debt to total capitalization as included in the consolidated balance sheet is presented under the sub heading "Non-GAAP Information Reconciliation" below.
Please see Note 11 "Financing" for a discussion about the covenants requirements related to our long-term debt.
Capital investment programs
A discussion of our capital investment programs is an important part of understanding our liquidity and capital resources. We expect to meet the cash requirements for these capital investments from cash on hand, internally generated funds and from additional external financing if required. For information regarding our capital expenditure programs, please see the discussion under the caption "Capital Investment Program" under this Item 7.
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CONTRACTUAL OBLIGATIONS
The following table summarizes our significant contractual obligations as of
December 31, 2019 :
Payments due by Period
2025 and
Total 2020 2021 2022 2023 2024 Thereafter
(dollars in millions)
Longterm debt $ 7,051.1 $ 400.0 $ - $ 300.0 $ - $ - $ 6,351.1
Interest on debt 7,890.0 378.8 380.0 378.4 369.4 369.5 6,013.9
Uncertain tax
position(a) 68.9 9.8 0.7 - - - -
Workers'
participation 174.9 174.9 - - - - -
Pension and
postretirement
obligations 40.1 4.5 3.2 3.3 3.4 3.7 22.0
Operating leases 1,386.5 116.1 116.0 112.9 111.6 103.6 826.3
Asset retirement
obligation 262.3 - - - - - 262.3
Purchase
obligations:
Commitments to
purchase energy 3,077.5 237.3 239.5 239.5 257.6 257.6 1,846.0
Capital investment
projects 198.2 198.2 - - - - -
Total $ 20,149.5 $ 1,519.6 $ 739.4 $ 1,034.1 $ 742.0 $ 734.4 $ 15,321.6 The above table does not include any scheduled payments related to
uncertain tax position liabilities because there is often a high degree of
(a) uncertainty regarding the timing of future cash outflows. As of
2019, the tax liability recognized by the Company is
included as non-current liability in the consolidated Balance Sheet. Please
refer to Note 7 "Income Taxes" of our consolidated financial statements.
Long-term debt payments do not include the debt discount valuation account and
issuance costs of
Interest on debt is calculated at rates in effect at
Workers' participation is currently calculated based on Peruvian Branch and Mexican pre-tax earnings. InPeru , the provision for workers' participation is calculated at 8% of pre-tax earnings. The current portion of this participation, which is accrued during the year, is based on the Peruvian Branch's taxable income and is largely distributed to workers following determination of final results for the year. Amounts in excess of 18 times a worker's salary is distributed to governmental bodies. In Mexico, workers' participation is determined using the guidelines established in the Mexican income tax law at a rate of 10% of pre-tax earnings as adjusted by the tax law. Operating leases include lease payments for power generating facilities to MGE, vehicles and properties. Please refer to Note 9 "Leases" of our consolidated financial statements.
Pension and post retirement obligations include the benefits expected to be paid under our pension and post-retirement benefit plans. Please refer to Note 12 "Benefit Plans" of our consolidated financial statements. Asset retirement obligations include the aggregate amount of the closure and remediation costs of our Peruvian mines and facilities to be paid under the mine closure plans approved by MINEM and the closure and remediation costs of our Mexican operations. See Note 10 "Asset Retirement Obligation." InJune 2014 , we entered into a power purchase agreement for 120 megawatt ("MW") with the state companyElectroperu S.A. , which began supplying energy for our Peruvian operations for twenty years starting onApril 17, 2017 . InJuly 2014 , we entered into a power purchase agreement for 120MW with a private power generatorKallpa Generacion S.A. ("Kallpa"), which began supplying energy for our Peruvian operations for ten years starting onApril 17, 2017 . InMay 2016 , we signed an additional power purchase agreement for a maximum of 80MW with
Kallpa,
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under which Kallpa will supply energy for the operations related to the
Toquepala Expansion and other minor projects for ten years starting on
Also we have a commitment to purchase power for our Mexican operations from MGE, a subsidiary of Grupo Mexico through 2032. See Note 13 "Commitment and Contingencies-Other commitments".
Amounts indicated on the above table are based on our long-term estimated power costs, which are subject to change as energy generation costs change and our forecasted power requirements through the life of the agreements change. Capital investment projects include committed purchase orders and executed contracts for our Mexican projects, and for our Peruvian expansion projects at Tia Maria
and the Toquepala mine. CYBERSECURITY: Our operations depend upon information technology systems which may be subject to disruption, damage or failure from different sources, including, without limitation, installation of malicious software, computer viruses, security breaches, cyber-attacks and defects in design. In recent years, cybersecurity incidents have increased in frequency and include, but are not limited to, malicious software, attempts to gain unauthorized access to data and other electronic security breaches that could lead to disruptions in systems, unauthorized release of confidential or otherwise protected information and the corruption of data. We have implemented appropriate preventative measures to mitigate potential risks by implementing an information security management system, which ensures putting into effect controls that are frequently reviewed and tested, including a risk matrix that considers all the possible threats with an impact and probability analysis, actions to avoid or mitigate them and the corresponding testing plan.
NON-GAAP INFORMATION RECONCILIATION
Operating cash cost: Following is a reconciliation of "Operating Cash Cost" (see
page 70) to cost of sales (exclusive of depreciation, amortization and
depletion) as reported in our consolidated statement of earnings, in millions of
dollars and dollars per pound in the table below:
2019 2018 2017
$ per $ per $ per
$ millions pound $ millions pound $ millions pound
Cost of sales (exclusive of
depreciation, amortization and
depletion) $ 3,606.4 $ 1.69 $ 3,409.0 $ 1.81 $ 3,252.8 $ 1.74
Add:
Selling, general and
administrative 131.8 0.06 102.6 0.05 93.1 0.05
Sales premiums, net of treatment
and refining charges 28.7 0.02 13.9 0.01 22.4 0.01
Less:
Workers' participation (214.5) (0.10) (226.1) (0.12) (196.2) (0.11)
Cost of metals purchased from
third parties (263.4) (0.12) (384.5) (0.20) (363.2) (0.19)
Royalty charge and other, net (125.7) (0.06) (125.0)
(0.07) (150.5) (0.08)
Inventory change 67.6 0.03 114.5 0.06 139.1 0.07
Operating Cash Cost before
byproduct revenues $ 3,230.9 $ 1.52 $ 2,904.4 $ 1.54 $ 2,797.5 $ 1.49
Add:
Byproduct revenues(1) (1,307.3) (0.61) (1,211.4) (0.64) (1,030.2) (0.55)
Net revenue on sale of metal
purchased from third parties (51.9) (0.03) (56.3)
(0.03) (50.2) (0.02)
Total byproduct revenues (1,359.2) (0.64) (1,267.7) (0.67) (1,080.4) (0.57)
Operating Cash Cost net of
byproduct revenues 1,871.7 0.88 1,636.7 0.87 1,717.1 0.92
Total pounds of copper produced
(in millions) 2,133.3 1,886.8 1,874.5
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(1) By-product revenues included in our presentation of operating cash cost
contain the following:
2019 2018 2017
$ per $ per $ per
$ millions pound $ millions pound $ millions pound
Molybdenum $ (549.4) $ (0.26) $ (509.9) $ (0.27) $ (353.4) $ (0.19)
Silver (278.3) (0.13) (244.5) (0.13) (254.9) (0.14)
Zinc (211.5) (0.10) (229.5) (0.12) (221.6) (0.12)
Sulfuric Acid (158.8) (0.07) (111.3) (0.06) (71.9) (0.04)
Gold (53.2) (0.03) (53.1) (0.03) (61.7) (0.03)
Other (56.1) (0.02) (63.1) (0.03) (66.7) (0.03)
Total $ (1,307.3) $ (0.61) $ (1,211.4) $ (0.64) $ (1,030.2) $ (0.55)
The by-product revenue presented does not match with the sales value reported by
segment on page 150 because the above table excludes purchases from third
parties, which are reclassified to net revenue on sale of metal purchased from
third parties.
Net debt to net capitalization: Net debt to net capitalization as of
2019 2018
Total debt $ 6,940.8 $ 5,960.1
Cash and cash equivalents (1,925.1) (844.6)
Shortterm investments (80.7) (213.8)
Net debt 4,935.0 4,901.7
Net capitalization:
Net debt 4,935.0 4,901.7
Equity 6,858.2 6,612.8
Net capitalization $ 11,793.2 $ 11,514.5
Net debt/net capitalization(*) 41.8 % 42.6 %
(*) Represents net debt divided by net capitalization.
Total debt to total capitalization: Total debt to total capitalization as of
2019 2018
Total debt $ 6,940.8 $ 5,960.1
Capitalization
Debt 6,940.8 5,960.1
Equity 6,858.2 6,612.8
Total capitalization $ 13,799.0 $ 12,572.9 Total debt/total capitalization(*) 50.3 % 47.4 %
(*) Represents debt divided by total capitalization.
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