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 and our principal operations are in
Outlook: Various key factors will affect our outcome. These include, but are not limited to, the following:
Sales structure: In the first quarter of 2021, approximately 83.6% of our ? revenue came from the sale of copper; 6.7% from molybdenum; 5.5% from silver;
1.4% from zinc; and 2.8% from various other products, including gold, sulfuric
acid and other materials.
Copper: In the first quarter of 2021, the LME copper price increased from an
? average of
Currently, we are seeing prices over
positive outlook for the 2021 copper market. We believe the following factors are influencing the market:
? The automobile industry's global recovery was reflected in an 89% increase in
production in the first quarter of 2021.
The
? significantly increase the demand for copper, which is a fundamental element at
green energy facilities.
The combined inventories of the LME, Comex,
? remain at relatively low levels, particularly given the number days of
consumption considered.
The most important market intelligence houses for the copper market are
? expecting a market deficit this year due to a significant recovery in demand,
which should be between 3.5% and 5.5%.
Molybdenum: Represented 6.7% of our sales in the first quarter of 2021 and is
? currently our most significant by-product. Molybdenum prices averaged
per pound in the first quarter of 2021, compared to
2020. This represented a 17.1% increase.
Molybdenum is mainly used in the production of special alloys for stainless steel that require significant hardness and corrosion and heat resistance. A new use for this metal is in lubricants and sulfur filtering of heavy oils and shale gas production.
36 Table of Contents
Silver: Represented 5.5% of our sales in the first quarter of 2021. We believe ? that the prices for silver will be supported by its level of industrial use and
the fact that, like gold, it represents value shelter in times of economic
turmoil.
Zinc: Represented 1.4% of our sales in the first quarter of 2021. We consider ? zinc has very good long term fundamentals due to high levels of industrial
consumption and expected production.
? Production: In 2021 and 2022, we expect to produce 943,000 tons of copper given
that production during these
periods will be affected by a temporary reduction in ore grade and recovery at our Peruvian operations.
We expect our copper production to recover by 2023 and reach 1,031,000 tons of production as we get Peruvian
production back on track and generate new production on our
projects.
We also expect to produce 21.4 million ounces of silver in 2021, in line with 2020 production. In 2021, we expect to
produce 76,200 tons of zinc from our mines, up 10.5% from 2020 production level. Additionally, we expect to produce 26,800 tons of molybdenum, which represents a decrease of 11.3% compared to 2020 production levels.
Capital Investments: In the first quarter of 2021, we spent
figure registered for the same period in 2020, and represented 30.5% of net
income. CYBERSECURITY EVENT
On
After the attack we immediately began a remediation and recovery process, and as of the reporting date the affected servers have been completely restored. So far, the forensic investigation has not identified any concrete evidence of information stolen during the attack. We are implementing an information security strategy to ensure business continuity based on processes (controls and corporate governance framework), technology and human capital (organizational culture). The areas of compliance, internal control, information technology and internal audit are working together to integrate the reference frameworks, the risk management models and the necessary controls to implement the strategy and programs of information security.
As of
COVID-19
In
37 Table of Contents
As of
The Company maintains a solid financial position and performance level. We believe this has allowed and will continue to allow us to deal with the effects of the pandemic in a way that prevents adverse material effects on our operations and financial results. The table below compares some of our financial information as follows:
Mar-21 Dec-20 Mar-20 ($ in millions, except ratios) Cash and cash equivalents 2,267.3 2,183.6 2,051.6 Accounts receivable 1,324.4 1,136.6 789.7 Total assets 17,218.4 16,946.5 16,212.1 Long term debt 6,545.1 6,544.2 6,541.8 Sales 2,532.5 7,984.9 1,719.7 RATIOS
Current assets to current liabilities 3.66 3.49 2.98 Accounts receivable turnover (1) 1.91 7.03 2.18 Total debt ratio (2)
0.38 0.39 0.43 Net income margin (3) 30.2% 19.7% 12.5%
(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 in
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 control of access to facilities. 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 maintain proper environmental safeguards. Our
COVID-19 emergency protocol has reinforced preventive measures such as
disinfecting, clinical monitoring before work, cleaning and sanitizing of work
areas and respect for social distancing. We have also restricted the access of
contractors, suppliers and personnel to our facilities if visits are not
indispensable and enforced multiple actions to limit workforce exposure to
COVID-19 by imposing travel restrictions, prohibiting face-to-face meetings and
urging frequent hand washing, as well as adhering to all other health, safety
and social distancing measures required by governmental authorities. At
38 Table of ContentsKEY MATTERS
Below, we discuss several matters that we believe are important to understand the results of our 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.
Earnings: The table below highlights key financial and operational data of our
Company for the three months ended
Three months ended March 31, 2021 2020 Variance % Change Copper price LME 3.85 2.56 1.29 50.4 % Pounds of copper sold 529.6 554.5 (24.9) (4.5) % Net sales$ 2,532.5 $ 1,719.7 $ 812.8 47.3 % Operating income$ 1,351.6 $ 533.3 $ 818.3 153.4 % Net income attributable to SCC$ 763.8 $ 214.8 $ 549.0 255.6 % Earnings per share$ 0.99 $ 0.28 $ 0.71 253.6 % Dividends per share$ 0.60 $ 0.40 $ 0.20 50.0 %
Net sales in the first quarter of 2021 were 47.3% higher than in the same period of 2020, which was primarily attributable to higher metal prices for copper (+50.4% LME), silver (+55.8%), molybdenum (+17.1%) and zinc (+28.9%). This was slightly offset by lower sales volume of copper (-4.5%), molybdenum (-0.1%), silver (-0.2%) and zinc (-36.1%).
Net income attributable to SCC in the first quarter of 2021 was 255.6% higher than in the same period of 2020. This growth was mainly attributable to the increase in metal prices mentioned above and to stable operating costs (-0.5%).
Production: The table below highlights our mine production data for the three
months ended
Three months ended March 31, 2021 2020 Variance % Change
Copper (in million pounds) 525.6 533.5 (7.9) (1.5) % Molybdenum (in million pounds) 15.9 15.8 0.1 0.2 % Silver (in million ounces) 5.0 5.3 (0.3) (6.3) % Zinc (in million pounds)
36.3 42.5 (6.2) (14.5) % The table below highlights our copper production data for the three months endedMarch 31, 2021 and 2020: Three Months Ended March 31, Copper (in million pounds): 2021 2020 Variance % Change Toquepala 128.5 133.5 (5.0) (3.8) % Cuajone 87.5 89.1 (1.6) (1.8) % La Caridad 72.3 73.6 (1.3) (1.8) % Buenavista 231.9 232.3 (0.4) (0.2) % IMMSA 5.4 5.0 0.4 8.0 % Total mined copper 525.6 533.5 (7.9) (1.5) %
Mined copper production in the first quarter of 2021 fell slightly by 1.5% to situate at 525.6 million pounds compared to 533.5 million pounds in the first quarter of 2020. This was mainly attributable to:
? Lower production at our Peruvian and Mexican operations due to lower ore
grades. This was slightly offset by
? Higher production at our IMMSA operations due to higher ore grades.
39 Table of Contents
Molybdenum production increased 0.2% in the first quarter of 2021 with regard to
the levels registered in the first quarter of 2020. This was attributable to an
increase in production at our Peruvian mines (+10.1%) due to higher grades and
recoveries and to growth in production at the
Silver mine production decreased 6.3% in the first quarter of 2021 due to a drop
in production at the Toquepala (-9.0%),
Zinc production decreased 14.5% in the first quarter of 2021 compared with the
same period of 2021. This decrease was mainly attributable to lower production
at
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 54. 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. Additional exclusions 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 covering 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 areas of concern within operating management. 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
40
Table of Contents
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 to determine whether to move forward or not in 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, 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, 2021 2020 Variance % Change Total operating cash cost before byproduct revenues$ 771.3 $ 732.9 $ 38.4 5.2 % Total byproduct revenues$ (393.7) $ (332.2) $ (61.5) 18.5 % Total operating cash cost net of byproduct revenues$ 377.6 $ 400.7 $ (23.1) (5.8) %
Total pounds of copper produced(2) 510.8 517.9 (7.1) (1.4) % Operating cash cost per pound before byproduct revenues
$ 1.51 $ 1.42 $ 0.10 6.7 %
Byproducts per pound revenues
$ 0.74 $ 0.77 $ (0.03) (3.9) %
(1) These are non-GAAP measures. Please see page 54 for reconciliation to GAAP
measure.
(2) Net of metallurgical losses.
As seen in the table above, our per pound cash cost before by-product revenues in the first quarter of 2021 was 6.7% higher compared with the same period of 2020. This increase is mainly attributable to an increase in production costs and to the unit cost effect of lower production. Our cash cost per pound net of by-product revenues for 2021 decreased 3.9% when compared with the same period of 2020. This was mainly attributable to a significant increase in 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 2021, assuming that expected metal production and sales are achieved, tax rates remain unchanged and no effects are generated by 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
41 Table of Contents
Segment information is included in our review of "Results of Operations" in this item and also in Note 13 "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
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
42 Table of Contents Projects inPeru :
Quebrada Honda dam expansion - Tacna: This project aims to enlarge the main and
lateral dams in Quebrada Honda and includes the relocation of some facilities
due to dam growth and implementation of other facilities for water recovery,
among other factors. As of
The Company has been consistently working to promote the welfare of the Islay
province population. As part of these efforts, we have implemented successful
social programs in education, healthcare and productive development to improve
the quality-of-life in the region. We also have promoted agricultural and
livestock activities in the
On
We consider that the initiation of construction activities at Tia Maria will
generate significant economic opportunities for the Islay province and the
Arequipa region. During the construction and operation phase, we will make it a
priority to hire local labor to fill the 9,000 jobs (3,600 direct and 5,400
indirect) that we expect to generate during
This greenfield project, located in
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, 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.
43
Table of Contents
combined operation of concentrator and SX-EW processes to produce 130,000 tons
of copper and 7,500 tons of molybdenum anually. The estimated capital investment
is
we continued to work on these activities and plan to conclude the environmental impact assessment for the project in
2021.
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.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE ("ESG")
We are committed to improving our ESG record by adopting best practices. In this
regard, our sustainable development policies were recently updated. These
policies, applicable to SCC and its subsidiaries, formalize our vision,
commitments and objectives to promote sustainable development and generate
shared value for our stakeholders. For further information on our disclosure on
In 2020, and for the second consecutive year, SCC was listed on SCC Dow Jones Sustainability Index MILA. Additionally, our score on S&P Global's annual sustainability assessment increased to 50 points during the same period; this represents a 5-point increase over 2019's level.
In
In addition to this effort, in
In 2020, the 3,667 students from 11 educational centers sponsored by us in
44
Table of Contents
children. Alongside these efforts, we offered virtual workshops to the community, which have been reproduced more than 10 million times since the beginning of the pandemic.
Last year was marked by a good performance in terms of occupational safety since
no fatalities were registered, and accident rates and lost days in the mining
division dropped by 44% and 78% respectively compared to 2019. Minera México
obtained, for the second consecutive year, three of the six distinctions ("
CLIMATE CHANGE
Peruvian operations: On
Mexican operations: Grupo Mexico, the indirect parent of SCC has issued
sustainability reports under the
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
45
Table of Contents
financial lease liabilities, classification of operating leases versus financial leases, valuation allowances for deferred tax assets, unrecognized tax benefits and fair value of financial instruments. We base our estimates on historical experience and on various other assumptions that we believe reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
© Edgar Online, source