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 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 2023, approximately 76.9% of our ? revenue came from the sale of copper; 10.8% from molybdenum; 4.1% from silver;
3.3% from zinc; and 4.9% from various other products, including gold, sulfuric
acid, and other materials.
Copper: In the first quarter of 2023, the LME copper price decreased from an
average of
partially offset by the good news on China´s economy, which is growing at a
higher pace than expected.
Current prices for copper are at around
? A reduction in global inflation, which may slow down or even stop the interest
rates hike cycle led by the FED and the
? The mentioned bouncing back of the Chinese economy with GDP growth of 4.5%.
Uncertainty regarding future production growth in
? together represent about 40% of the global supply.
copper production decline of 4% for March of this year.
The most relevant market intelligence houses for the copper market are
currently expecting a market in balance or a small deficit of about 100,000
? tons for 2023. This assumes a growth in demand of about 2.0-2.5% this year, but
a lower than expected supply growth estimated at about 1.5-2.0% due to the
first quarter stoppages in
? Low copper inventories, which stood at 411,000 tons as of
are one of the lowest since 2005.
It is important to emphasize that copper plays a leading role in the global shift to clean energy, which correlates positively with our assertion that the underlying demand for copper will be strong in the long-term. In this scenario, we believe the current cycle of low prices should be short-lived.
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Molybdenum: Accounted for 10.8% of our sales in the first quarter of 2023 and
? is currently our most important by-product. Molybdenum prices averaged
per pound in the first quarter of 2023, compared to
of 2022, reflecting an increase of 68.7%.
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 4.1% of our sales in the first quarter of 2023. We believe ? that the prices for silver will be supported by intensive level of industrial
use.
Zinc: Represented 3.3% of our sales in the first quarter of 2023, with an
? average price of
quarter of 2022. Zinc is currently our third by-product.
Production: For 2023, we expect production to reach approximately 939,400
tonnes of copper, which represents an increase of 5% compared to our 2022 ? production. This growth will unfold as we get Peruvian production back on track
which coupled with new production in our Mexican operations through our
and Buenavista Zinc Concentrator projects.
We also expect to produce 23,400 tonnes of molybdenum, which represents a decrease of 10.8% over our 2022 production level. In 2023, we expect to produce 20.3 million ounces of silver, an increase of 9.1% compared to 2022 production level. Additionally, we expect to produce 116,300 tonnes of zinc from our mines. which represents an increase of 93.8% over our 2022 production level. This growth will be driven by the production start-up of the Buenavista Zinc operations (+51,600 tonnes) and by the recovery of the IMMSA mines production (+6,200 tonnes), where better ore grade areas have been identified. For 2024 and on we expect to produce over 200,000 tonnes of zinc per year.
Capital Investments: In the first quarter of 2023, we spent
capital investments; this represented 29.3% of net income and an increase of ? 16.0% compared to the amount registered for the same period in 2022. We
continue to advance our projects, including the Buenavista Zinc,
CYBERSECURITY
In the first quarter of 2023, we have had no material cybersecurity incidents. This is due to the Information Security Strategy that we have implemented and the commitment of our entire organization to consolidate a living and effective security culture.
Our focus on information security continues to be a strategic priority, our security policy focuses on continuously identifying and managing risks through standard frameworks and best practices. In addition to the training and awareness that we extend to our employees, we constantly monitor the effectiveness of our controls.
The Board of Directors has been proactive in its approach to cybersecurity, seeking to ensure that our organization remains secure and resilient to cyber threats, we have significantly improved our security posture and continue to moving forward with our information security strategy.
We know that, in today's environment, cyber threats are becoming more sophisticated and rapidly evolving risk management is critical to long-term business success. We remain alert to emerging challenges and with active investment processes to evolve our capabilities, improve our processes and promote the development of a safety culture in our organization.
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KEY 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,
2023 2022 Variance % Change
Copper price LME 4.05 4.53 (0.48) (10.6) %
Pounds of copper sold 504.3 458.4 45.9 10.0 %
Net sales $ 2,793.9 $ 2,763.8 $ 30.1 1.1 %
Operating income $ 1,353.7 $ 1,470.1 $ (116.4) (7.9) %
Net income attributable to SCC
$ 1.05 $ 1.02 $ 0.03 2.9 % Dividends per share$ 1.00 $ 1.00 $ - - %
Net sales in the first quarter of 2023 were 1.1% higher than in the same period of 2022. This increase was driven by an increase in sales volumes of copper (+10.0%), silver (+15.5%) and zinc (+6.4%) and by an uptick in molybdenum (+68.7%) prices. This effect was offset by lower sales volumes of molybdenum (-7.9%) and by a drop in prices of copper (-10.6% - LME), silver (-6.3%) and zinc (-16.5%).
Net income attributable to SCC in the first quarter of 2023 was 3.6% higher than in the same period of 2022. This increase was mainly attributable to the higher sales volumes of copper, silver and zinc; this effect was slightly offset by a drop in average prices for metals with the exception of molybdenum, as well as by a decrease in the sales volumes of molybdenum.
Production: The table below highlights our mine production data for the three
months ended
Three months ended March 31,
2023 2022 Variance % Change
Copper (in million pounds) 492.2 472.8 19.4 4.1 % Molybdenum (in million pounds) 14.2 15.6 (1.4) (8.8) % Silver (in million ounces) 4.4 4.3 0.1 3.1 % Zinc (in million pounds)
33.2 32.5 0.8 2.4 %
The table below highlights our mine production data for the three months ended
Three Months Ended March 31,
Copper (in million pounds): 2023 2022 Variance % Change
Toquepala 113.1 112.5 0.6 0.6 %
Cuajone 80.0 53.8 26.2 48.5 %
La Caridad 57.6 64.5 (6.9) (10.8) %
Buenavista 236.9 237.7 (0.8) (0.3) %
IMMSA 4.6 4.3 0.3 7.5 %
Total mined copper 492.2 472.8 19.4 4.1 %
First quarter: Mined copper production in the first quarter of 2023 increased 4.1% to 492.2 million pounds compared to 472.8 million pounds in the first quarter of 2022. This was mainly attributable to the fact that production at our Cuajone mine was up 48.5% YoY. This result was driven by higher ore grades and a return to full operating capacity this year. Production at our Toquepala mine and IMMSA operations increased 0.6% and 7.5% respectively with regard to the
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figures reported in the first quarter of 2022, driven by higher ore grades and
recoveries. This was slightly offset by a drop in production at our
Molybdenum production fell 8.8% in the first quarter of 2023 compared to the
levels registered in the first quarter of 2022. This was attributable to a drop
in production at our Toquepala mine (-45.6%) which was mainly driven by a
reduction in ore grades. This effect was partially offset by an increase in
production at our Cuajone (+66.7%),
Silver mine production increased 3.1% in the first quarter of 2023 compared with
the same period of 2022. This was mainly attributable to a higher production at
our Cuajone (+44.3%) and Toquepala (+9.3%) mines. This was offset by lower
production at our
Zinc production increased 2.4% in the first quarter of 2023 compared to the same
period in 2022. This result was mainly attributable to an uptick in mineral
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 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. 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.
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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,
2023 2022 Variance % Change
Total operating cash cost before
byproduct revenues $ 987.7 $ 837.7 $ 150.0 17.9 %
Total byproduct revenues $ (630.6) $ (583.5) $ (47.1) 8.1 %
Total operating cash cost net of
byproduct revenues $ 357.1 $ 254.2 $ 102.9 40.5 %
Total pounds of copper produced(2) 473.0 457.8 15.2 3.3 % Operating cash cost per pound before byproduct revenues
$ 2.09 $ 1.83 $ 0.26 14.2 %
Byproducts per pound revenues
$ 0.76 $ 0.55 $ 0.21 38.2 %
(1) These are non-GAAP measures. Please see page 51 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 2023 was 14.2% higher than in the same period of 2022. This increase was mainly attributable to an increase in production costs and slightly offset by the unit cost effect generated by a 3.3% increase in pounds of copper produced. Our cash cost per pound net of by-product revenue for the first quarter of 2023 increased 38.2% when compared to the same period of 2022. This was mainly driven by an uptick in the production cost, which was partially offset by an increase in by-product revenue credits due to higher sales volume in most of our 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, 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 2023, 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) $ 93.9 $ 22.5 $ 18.2 $ 9.5 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
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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. All capital spending plans will continue to be reviewed and adjusted to respond to changes in the economy and market conditions.
Projects in
Buenavista Zinc - Sonora: This project is located within the
Project update: the capital budget of the project is
Project update: The budget for
approximately 45 kilometers from our
probable reserves of 317 million tonnes of ore with an average copper grade of
0.249%. We anticipate that
operate as a conventional open-pit mine with an annual production capacity of 36,000 tonnes of copper cathodes. This
operation will use highly cost efficient and environmentally friendly SX-EW
technology. The budget for
million.
Project update: The results from experimental pads in the leaching process have confirmed adequate levels of copper recovery. The basic engineering study is finished and the Company continues developing the project and engage in onsite environmental activities. Detailed engineering is on-going at the SX-EW plant. We expect production to begin in 2025 and mine life is estimated at 13 years.
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Lime plant - Sonora: As part of our cost improvement projects, we built 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 have also promoted agricultural and
livestock activities in the
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. Given the current Peruvian economic situation, it is
crucial to move ahead on projects that will stimulate a sustainable growth
cycle. We will make it a priority to hire local labor to fill the 9,000 jobs
that we expect to generate during
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 and market conditions.
Project update: The Company has completed the environmental baseline study for the mine and industrial facilities and is reviewing the basic engineering analysis to request the environmental impact permits.
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Project update: As of
In 2021, the Company signed Social Agreements with the Michiquillay and the Encañada Communities. In addition, on
Project update: In the fourth quarter of 2022, the Company informed MINEM that it had begun exploration activities and initiated an assessment of the existing mineral resource at depth. In 2023, in accordance with our social agreements with the Michiquillay and La Encañada communities, the Company has hired unskilled labor and is paying for the use of surface land. We are supporting social programs in both communities as we roll out exploration activities.
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 CORPORATE GOVERNANCE ("ESG")
Sustainable Development Report. This year,
Sustainable Development Committee. In 2022, SCC set up a Sustainable Development Committee, which is presided by an independent Director. This committee's main objective is to support SCC's Board of Directors in its endeavors to supervise management of risks and opportunities in the environmental, safety and health, community development, human rights and corporate governance ambits. The committee meets every quarter and has assessed diverse aspects of the Company's ESG trajectory, including adhesion to international agreements and management of water and mineral waste. The Sustainable Development Committee, in its third session, addressed climate change as well as diversity and inclusion and identified opportunities on the corporate governance front.
Third-party certification. In line with our commitment to implement best
environmental, social and corporate governance practices, our
Occupational Safety and Health. At SCC, our employees' safety is our priority.
Our unit in Ilo, located in Moquegua,
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performance with regard to indicators of our employees' occupational safety and health and is a reflection of our on-going commitment to ensure the sustainability of our operations.
Biodiversity. In
Diversity and Inclusion. At SCC, we are convinced that valuing diversity, preventing discrimination, and promoting
openness to different ways of thinking are fundamental in all efforts to develop inclusive workplace environments that
promote the integral development of our employees and stakeholders. We are committed to driving the agenda for
diversity and inclusion transversally throughout the Company and in the communities around our operations. Our
results in 2022 reflect the fruit of our efforts, with a 16% increase in the number of women employed by SCC.
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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