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 2022, approximately 78.0% of our ? revenue came from the sale of copper; 10.0% from molybdenum; 3.8% from silver;
3.6% from zinc; and 4.6% from various other products, including gold, sulfuric
acid and other materials.
Copper: In the first quarter of 2022, the LME copper price increased from an
average of
higher than the 2021 average of
for the Company. We believe the following factors are influencing the market:
? The most relevant market intelligence houses for the copper market are
expecting a market deficit for 2022 of about 100,000 tonnes.
This assumes growth in demand of 2.0 -2.5% in 2022, particularly in terms of
? cathode consumption in the
to the recent COVID-19 outbreak.
Uncertainty regarding future production growth in
? together represent about 40% of the global supply.
production drop of 7.0% in the first quarter of 2022, while 20% of
production is currently at risk due to social conflicts.
?
market due to the invasion of
Molybdenum: Represented 10.0% of our sales in the first quarter of 2022 and is
? currently our most important by-product. Molybdenum prices averaged
pound in the first quarter of 2022, compared to
2021. This represented a 69.7% increase.
Regarding this by-product, we believe that prices will be supported by lower
exports from
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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 associated with lubricants, sulfur filtering of heavy oils and shale gas production.
Silver: Represented 3.8% of our sales in the first quarter of 2022. We believe ? that the prices for silver will be supported by its intensive level of
industrial use and the fact that, like gold, it represents value shelter in
times of economic turmoil.
Zinc: Represented 3.6% of our sales in the first quarter of 2022. We consider ? zinc has very good long term fundamentals due to high levels of industrial
consumption and expected production.
Production: For 2022, we expect to produce 895,800 tons of copper, which ? represents a decrease of 6.5% compared to 2021. Production will continue to be
affected by the stoppage at Cuajone and by the temporary reduction in ore
grades and recoveries at the Peruvian operations.
We expect our copper production to bounce back in 2023 and reach 971,200 tonnes
as we get Peruvian production back on track and generate new production through
our projects at
We also expect to produce 25,300 tonnes of molybdenum, which represents a decrease of 16.4% over our 2021 production levels. In 2022, we expect to produce 18.7 million ounces of silver, which represents a slight decrease of 2.4% over our 2021 production level. Additionally, we expect to produce 69,700 tonnes of zinc from our mines, up 4.1% from 2021 production.
Capital Investments: In the first quarter of 2022, we spent
11.8% compared to the amount registered for the same period in 2021.
CYBERSECURITY
Our operations depend upon information technology systems that 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 application of controls that are frequently reviewed and tested.
In
After the attack, we immediately began a remediation and recovery process and completely restored the affected servers. The forensic investigation did not identify concrete evidence that any information was stolen during the attack. However, we maintain active lines of cyberintelligence and continue to monitor the DarkWeb/DeepWeb and social networks to identify any publication or activity related to the Company to validate the technological controls affected during the attack and ensure that our systems infrastructure remains secure.
In
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analysis with the assistance of a professional consulting firm with international experience in this area. The recommendations received were integrated in current information security programs.
Additionally, AMC set up a task force to oversee ongoing initiatives and ensure that targets are met. We are actively following this matter with the task force, our internal audit team and; will also require the expertise of third parties.
Our new information security strategy is being executed on a continuous basis.
The compliance, internal control, information technology and internal audit
departments are all working together to integrate reference frameworks, risk
management models and the necessary controls to continue executing this strategy
and corresponding programs. To support our commitment to the strategy, we are
working under the international framework for reference and standard, such as
ISO, COBIT and NIST, to certify the Company´s security systems. The Company has
also established an information security culture with the purpose of training,
communicating and maintaining permanent awareness among the workforce. On the
governance framework side, the Company has created a
For 2022 we have a non-material special budget to continue improvements in this area.
CUAJONE STOPPAGE OF OPERATIONS
On
As of
The impact to our results and financial position is not material as of
After several unsuccessful attempts by the authorities to restore order through
dialogue efforts, on
On
ECONOMIC CONSEQUENCES OF RUSSIA´S INVASION OF
The
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situation is also affecting the countries in which we operate and in which our clients and suppliers operate, although the extent of the impact varies.
As of
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, 2022 2021 Variance % Change Copper price LME 4.53 3.85 0.68 17.7 % Pounds of copper sold 458.4 529.6 (71.2) (13.4) % Net sales$ 2,763.8 $ 2,532.5 $ 231.3 9.1 % Operating income$ 1,470.1 $ 1,351.6 $ 118.5 8.8 %
Net income attributable to SCC
$ 1.02 $ 0.99 $ 0.03 3.0 % Dividends per share$ 1.00 $ 0.60 $ 0.40 66.7 %
Net sales in the first quarter of 2022 were 9.1% higher than in the same period of 2021, which was primarily attributable to higher metal prices for copper (+17.7%), molybdenum (+69.7%) and zinc (+36.0%), as well as to an increase in the sales volume of zinc (+98.8%). This was offset by a decrease in silver (-8.5%) prices as well as decreases in sales volume of copper (-13.4%), molybdenum (-2.4%) and silver (-16.8%).
Net income attributable to SCC in the first quarter of 2022 was 2.7% higher than in the same period of 2021. This growth was mainly attributable to the increase in metal prices and sales volumes mentioned above.
Production: The table below highlights our mine production data for the three
months ended
Three months ended March 31, 2022 2021 Variance % Change
Copper (in million pounds) 472.8 525.6 (52.8) (10.0) % Molybdenum (in million pounds) 15.6 15.9 (0.3) (1.9) % Silver (in million ounces) 4.3 5.0 (0.7) (14.0) % Zinc (in million pounds)
32.5 36.3 (3.8) (10.5) % 39 Table of Contents
The table below highlights our mine production data for the three months ended
Three Months Ended March 31, Copper (in million pounds): 2022 2021 Variance % Change Toquepala 112.5 128.5 (16.0) (12.5) % Cuajone 53.8 87.5 (33.7) (38.5) % La Caridad 64.5 72.3 (7.8) (10.8) % Buenavista 237.7 231.9 5.8 2.5 % IMMSA 4.3 5.4 (1.1) (20.4) % Total mined copper 472.8 525.6 (52.8) (10.0) %
First quarter: Mined copper production in the first quarter of 2022 fell by
10.0% to 472.8 million pounds compared to 525.6 million pounds in the first
quarter of 2021. This was mainly attributable to a drop in production at our
Cuajone (-38.5%), Toquepala (-12.6%),
Molybdenum production decreased 2.3% in the first quarter of 2022 compared to
the levels registered in the first quarter of 2021. This was attributable to an
increase in production at our Toquepala (+9.0%) and
Silver mine production decreased 13.4% in the first quarter of 2022 due to a
drop in production at the Toquepala (-24.4%), Cuajone (-34.8%),
Zinc production decreased 10.6% in the first quarter of 2022 compared to the
same period of 2021. This decrease was mainly attributable to lower production
at the
Operating Cash Costs: An overall benchmark that we use, which is 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 53. 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.
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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 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, 2022 2021 Variance % Change Total operating cash cost before byproduct revenues$ 837.7 $ 771.3 $ 66.4 8.6 % Total byproduct revenues$ (583.5) $ (393.7) $ (189.8) 48.2 % Total operating cash cost net of byproduct revenues$ 254.2 $ 377.6 $ (123.4) (32.7) %
Total pounds of copper produced(2) 457.8 510.8 (53.0) (10.4) % Operating cash cost per pound before byproduct revenues
$ 1.83 $ 1.51 $ 0.32 21.2 %
Byproducts per pound revenues
$ 0.55 $ 0.74 $ (0.19) (25.7) %
(1) These are non-GAAP measures. Please see page 53 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 2022 was 21.2% higher than in the same period of 2021. This increase was mainly attributable to an increase in production costs. Our cash cost per pound net of by-product revenue for the first quarter of 2021 decreased 25.7% when compared to the same period of 2021. 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, and for copper, molybdenum, zinc and silver in particular.
We are subject to market risks arising from the volatility of copper and other metal prices. For the remaining nine months of 2022, assuming that expected metal production and sales are achieved, tax rates remain unchanged and no
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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
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
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
by utilizing cash on hand; internally generated funds and additional external
financing, including funding received in
Projects in
Buenavista Zinc - Sonora: This project is located within the
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of
Lime plant - Sonora: As part of our cost improvement projects, we are building a
new lime plant with a production capacity of 600 metric tonnes per day, which
will be the largest lime plant of
Projects in
Quebrada Honda dam expansion - Tacna: This project aims to enlarge the main and
lateral dams in Quebrada Honda and includes the relocation and repowered 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
In 2021, SPCC fortified its relation with the regional government and successfully overcame its opposition to project initiation. This new consensus was reflected in an agreement for "works for taxes" for projects relative to health facilities and roads. Our efforts to ensure the current and long-term welfare of the population in the area of influence of the Tia Maria project were recognized by several local associations, which sent letters to the National Government to request project initiation.
We reiterate our view 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
We expect the Peruvian government to continue to acknowledge the significant
progress the project has made on the social front and the important
contributions that
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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.
0.45% and 52 million tonnes of sulfides with a copper content of 0.59%.
The Social Agreements with the Michiquillay and the Encañada communities
represent an opportunity to improve the quality of life of the residents of
those communities via our strong social programs and backed by a solid framework
for technical work at the project level. These events are important steps that
will allow
Michiquillay is a world class mining project with inferred mineral resources of
2,288 million tonnes with an estimated copper grade of 0.43%. When developed, we
expect Michiquillay to produce 225,000 tonnes 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.
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ENVIRONMENTAL, SOCIAL AND GOVERNANCE ("ESG")
In line with our sustainability strategy, we registered on-going improvement in our main sustainability indicators. In terms of safety, we reduced the accident rate of our own personnel and contractors by 22% in the last three years. With reference to the main environmental indicators, our Scope 1 and 2 greenhouse gas emissions have been reduced by more than 10%, while the efficiency in the consumption of fresh water in the concentrators has increased by 4% over the period. Regarding social matters, the population served through our community programs has tripled, while we continue to strengthen the mechanisms for listening and addressing their concerns.
In an effort to provide certainty to our investors and stakeholders, we present
our progress regarding third-party validation of our environmental and social
practices. We continue with the process of certifying our occupational health
and safety management systems under the international standard ISO 45001 and our
environmental management systems under ISO 14001 at all of our mining units. In
the first quarter of 2022, the
Regarding our climate change management, the company is now positioned above
average for the sector and region, in view of the fact that Grupo Mexico rose
two levels, from level C to level B, in the evaluation of the
The communities surrounding our operations in
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
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