SOUTHERN COPPER CORPORATION The following discussion provides information that management believes is
relevant to an assessment and understanding of the condensed consolidated
financial condition and results of operations of
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 in
Outlook: Various key factors will affect our outcome. These include, but are not limited to, some of the following:
Changes in copper, molybdenum, silver and zinc prices: In the first quarter of
2020, the average LME and COMEX copper prices were
respectively, 9.2% and 8.5% lower than in the same period of 2019, ? respectively. During the first quarter of 2020 per pound LME spot copper prices
ranged from
2020 decreased 18.3% and zinc prices decreased by 21.1%, when compared to the
average prices in the first quarter of 2019. Average silver prices increased
8.7% in the first quarter of 2020 when compared to the same period of 2019.
Sales structure: In the first quarter of 2020, approximately 79% of our revenue ? came from the sale of copper, 7% from molybdenum, 5% from silver, 4% from zinc
and 5% from various other products, including gold, sulfuric acid and other
materials.
Copper: During the first quarter of 2020 the LME copper price decreased, from
an average of
Currently we are seeing prices in the range of
supply. The world is currently experiencing the public health, financial and
economic impacts of the COVID-19 pandemic. Since it is affecting both, supply
and demand, at this point it is difficult to assess the full effect of this
crisis on the copper market balance and on copper prices.
On a normal year, we expect to have a seasonal copper inventories increase in
the first quarter of the year due to the New Year festivities of
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In a normal year, we expect the additional inventories to be partially absorbed through the rest of the year. For 2020, it is difficult to estimate when this may happen since we are seeing a much weaker demand than last year.
Molybdenum: Represented 7.3% of our sales in the first quarter of 2020.
? Molybdenum prices averaged
compared to
Molybdenum is mainly used in the production of special alloys for stainless steel that require significant hardness and corrosion and heat resistance. New uses for this metal are in lubricants, in sulfur filtering of heavy oils and shale gas production.
Zinc: Represented 3.8% of our sales in the first quarter of 2020. Zinc has very ? good long term fundamentals due to its significant industrial consumption and
the expected production.
Silver: Represented 5.1% of our sales in the first quarter of 2020 and it is ? currently our second by-product. We believe that silver prices will have
support due to its industrial uses as well as its linkage to gold as a value
shelter in times of economic uncertainty.
?Cost: Our operating costs and expenses for the first quarter of 2020 and 2019 were as follows:
Variance
2020 2019 Value %
Operating costs and expenses (in millions)
The increase was mainly due to higher cost of sales at all our operating segments; as well as higher depreciation, amortization and depletion at our Peruvian and Mexican open pit segments.
Capital Investments: In the first quarter of 2020 we spent
represented 46.7% of net income.
COVID-19: In
based on the rapid increase in global exposure. The full impact of the COVID-19
outbreak will continue and its magnitude on the Company's financial condition,
liquidity and future results of operations is uncertain. Senior Management is
actively monitoring the global situation on the Company´s financial condition, ? liquidity, operations, suppliers, industry and workforce and focusing
principally on the health, safety and well-being of our employees, their
families and the communities where we have operations. As of
there have not been major delays in the supply of material and services
critical for the operations, and sales. Additionally, shipments of products and
collections have had no known major delays.
As of
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Mar-20 Dec-19 Mar-19
($ in millions, except ratios)
Cash and cash equivalents 2,051.6 1,925.1 737.0
Accounts receivable 789.7 911.8 1,035.5
Total assets 16,212.1 16,407.4 15,542.6
Long term debt 6,541.8 6,541.0 5,960.9
Sales 1,719.7 7,285.6 1,753.4
RATIOSCurrent assets to current liabilities 2.98 2.83 2.83 Accounts receivable turnover (1) 2.18 7.99 1.69 Total debt ratio (2)
0.43 0.42 0.38
Net income margin (3) 12.5% 20.4% 22.1%
(1) Represents net sales divided by accounts receivable.
(2) Represents total debt divided by total assets.
(3) Represents net income divided by net sales, as a percentage.
Governmental authorities have declared that essential economic activities must continue during the COVID-19 health emergency. These activities include industrial mining and/or any other activity necessary to secure the production and distribution of essential services such as electricity, medical and hospital infrastructure and manufacture of health related supplies and technological equipment, which necessarily implies critical components and goods only produced by industrial mining, which are essential in the global supply chains to manufacture products and services to fight the pandemic, such as steel, copper, gold, coal, silver, zinc and cement, among many others.
Given the nature of mining operations, which are highly automated, conducted in remote locations and with mandatory use of personal safety equipment at all the mines, it is easier to implement and comply with COVID-19 protective measures, such as physical isolation and access control. Industrial mining uses advanced and reliable machinery and does not require high physical concentration of employees. In many cases, workers fulfill their duties maintaining distances of more than 100 meters from their closest coworkers.
At the present time, our operations are in compliance with all sanitary and
government regulations and maintaining proper environmental safeguards. It
should be noted that to date, there have been no known cases of COVID-19
contagion among our employees in our mining facilities in
As the spread of COVID-19 continues, reduced demand for products (including disruptions at the facilities of our transportation service providers or supply vendors) could have a material adverse effect on our business, operations and financial performance.
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) our earnings, (ii) our production, (iii) our "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.
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Earnings: The table below highlights key financial and operational data of our
Company for the three months ended
Three months ended March 31,
2020 2019 Variance % Change
Copper price LME 2.56 2.82 (0.26) (9.2) %
Pounds of copper sold 554.5 501.3 53.2 10.6 %
Net sales $ 1,719.7 $ 1,753.4 $ (33.7) (1.9) %
Operating income $ 533.3 $ 693.7 $ (160.4) (23.1) %
Net income attributable to SCC $ 214.8 $ 388.2 $ (173.4) (44.7) %
Earnings per share $ 0.28 $ 0.50 $ (0.22) (44.0) %
Dividends per share $ 0.40 $ 0.40 $ - - %
Net sales in the first quarter of 2020 were 1.9% lower than in the same period of 2019 mainly as a result of lower copper (-9.2% LME) and molybdenum (-18.3%) prices. This effect was largely offset by higher sales volumes of copper (+10.6%), molybdenum (+41.9%), silver (+8.2%) and zinc (+7.1%).
Net income in the first quarter of 2020 was 44.7% lower than in the first quarter of 2019. This decrease was mainly due to lower sales and higher operating costs (+12.0%). Costs increased due to higher sales volumes, leachable material and third parties copper purchases. The higher costs were partially offset by lower fuel cost and the effect of exchange rates depreciation on local currencies costs.
Production: The table below highlights our mine production data for the three
months ended
Three months ended March 31,
2020 2019 Variance % Change
Copper (in million pounds) 533.5 504.0 29.5 5.9 % Molybdenum (in million pounds) 15.8 11.3 4.5 39.8 % Silver (in million ounces) 5.3 4.3 1.0 21.6 % Zinc (in million pounds)
42.5 40.9 1.6 3.8 %
The table below highlights our copper production data for the three months ended
March 31, 2020 and 2019:
Three Months Ended March 31,
Copper (in million pounds): 2020 2019 Variance % Change
Toquepala 133.5 116.6 16.9 14.4 %
Cuajone 89.1 72.3 16.8 23.2 %
La Caridad 73.6 71.7 1.9 2.6 %
Buenavista 232.3 239.6 (7.3) (3.0) %
IMMSA 5.0 3.8 1.2 31.6 %
Total mined copper 533.5 504.0 29.5 5.9 %
Mined copper production in the first quarter of 2020 increased by 5.9% to 533.5 million pounds compared to 504.0 million pounds in the first quarter of 2019. This increase was principally due to:
Higher production at our Peruvian mines as result of the new Toquepala ? concentrator and higher ore grades and recoveries in the Cuajone mine;
partially offset by
? Lower production at the
Molybdenum production increased 39.8% in the first quarter of 2020 when compared
with the first quarter of 2019 as result of higher production at all our mines,
principally at the Toquepala mine (+280.3%) due to the new molybdenum plant that
started production in
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Silver mine production increased by 21.6% in the first quarter of 2020 due to
higher production at all our mines, highlighting the IMMSA operations (+35.7%),
principally at the
Mined zinc production increased 3.8% in the first quarter of 2020, compared with
the same period of 2019 , due to higher production at the
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 condensed consolidated statement of earnings is presented under the subheading, "Non-GAAP Information Reconciliation" on page 51. 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,
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 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.
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Our operating cash cost per pound of copper produced, before and net of
by-product revenues, is presented in the table below for the three months ended
Operating cash cost per pound of copper produced (1)
(In millions, except cost per pound and percentages)
Three Months Ended March 31,
2020 2019 Variance % Change
Total operating cash cost before
byproduct revenues $ 732.9 $ 749.4 $ (16.5) (2.2) %
Total byproduct revenues $ (332.2) $ (305.7) $ (26.5) 8.7 %
Total operating cash cost net of
byproduct revenues $ 400.7 $ 443.7 $ (43.0) (9.7) %
Total pounds of copper produced(2) 517.9 491.1 26.8 5.5 % Operating cash cost per pound before byproduct revenues
$ 1.42 $ 1.53 $ (0.11) (7.3) %
Byproducts per pound revenues
$ 0.77 $ 0.91 $ (0.13) (14.5) %
(1) These are non-GAAP measures. Please see page 51 for reconciliation to GAAP
measure.
(2) Net of metallurgical losses.
As set forth on the above table, our per pound cash cost before by-product revenues and net of it, in the first quarter of 2020, were 7.3% and 14.5% lower when compared with the first quarter of 2019, respectively. This decrease was the result of the unit cost effect of 5.5% higher production and higher by-product revenues.
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 metal prices. For the remaining nine months of 2020, assuming that expected metal production and sales are achieved, that tax rates are unchanged and giving no effect to potential hedging programs, metal price sensitivity factors would indicate the following change in estimated 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)
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. The Peruvian
operations produce copper, with significant by-product production of molybdenum,
silver and other material. Our Mexican open-pit operations include
Segment information is included in our review of "Results of Operations" in this item and also in Note 14 "Segment and Related Information" of our condensed consolidated financial statements.
Inflation and Exchange Rate Effect of the Peruvian Sol and the Mexican Peso: Our
functional currency is the
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such changes have not had a material effect on our results and financial position. Please see Item 3. "Quantitative and Qualitative Disclosures about Market Risk" for more detailed information.
Capital Investment Programs: We made capital investments of
Set forth below are descriptions of some of our current expected capital
investment programs. We expect to meet the cash requirements for these projects
from cash on hand, internally generated funds and from additional external
financing, including funding received in
Projects inMexico :
Buenavista Zinc - Sonora: This project is located within the
The
Projects inPeru :
Our main capital projects in
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 mills and will extend the expected life of this tailings facility
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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
Potential projects
We have a number of other projects that we may develop in the future. We evaluate new projects on the basis of our long-term corporate objectives, expected return on investment, environmental concerns, required investment and estimated production, among other considerations. All capital spending plans will continue to be reviewed and adjusted to respond to changes in the economy, market conditions or the COVID-19 pandemic.
The challenges to the construction permit were overcome when on
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 an 32 kilometer industrial railway and an access road
at a safe distance from the
Our social programs in education, healthcare and productive development will
continue to improve the quality of life, and the agricultural and livestock
activities in the
When in operation, we expect
This greenfield project, located in Arequipa,
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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
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.
ACCOUNTING ESTIMATES
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 with
Long-term inventory-Ore stockpiles on leach pads:
On
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