Southern Copper’s 2014 profit hit by lower copper prices

Southern Copper (NYSE: SCCO), controlled by Grupo Mexico, reported weak fourth quarter and full year 2014 earnings, largely due to a 7% drop in copper prices since 2013.

Fourth quarter earnings were US$348 million, or US43¢ a share, down 10% from a year ago. Nevertheless, this was better than the US37¢ per share that analysts on average had estimated. Full year profit was US$1.33 billion, down 18% from 2013.

Quarterly sales were US$1.47 billion, compared to US$1.54 billion in the earlier year, while full year sales fell nearly 3% to US$5.78 billion. Copper sales accounted for 78% of the sales in 2014, with silver, molybdenum, zinc and gold contributing the rest.

The company mined 183,612 tonnes of copper in the fourth quarter and 676,599 tonnes over 2014.

Despite producing more red metal, costs of sales improved by US$12.5 million in the quarter and by US$22.2 million in 2014. “These figures are quite remarkable when considering that the company actually increased its copper production by 11.2% in the fourth quarter of 2014 and by 9.7% in the full year,” Raul Jacob, Southern Copper’s chief financial officer, said on a Feb. 4 conference call.

“Production growth was attributable to the contribution from the expanded SX-EW circuit at Buenavista in Mexico and higher production in Peru,” BMO analyst Sasha Bukacheva writes.

Operating cash cost before by-product credits was US$1.77 per lb. copper in the fourth quarter, down 6% from a year ago. Full year operating costs before and net of by-product credits were US$1.89 and US$1.05 per lb., compared respectively to US$1.916 and US99.6¢ in 2013.

Byproduct credits have decreased year-over-year for moly and silver, but have increased for zinc and gold, Jacob notes.

Southern Copper is continuing its investment program this year to boost copper production capacity by 89% from its 2013 level of 617,000 tonnes to 1.16 million tonnes by 2018. It projects cash costs before byproduct credits will fall by US20¢ per lb. in the next few years as it improves its production profile, Jacob says.

For 2015, the company’s board has approved a US$2.7 billion capital expenditure program to complete the expansion at the Buenavista copper mine in Mexico and to start building the Tia Maria and Toquepala projects in Peru.

The company received environmental approvals for its Peruvian projects last year, and should obtain construction permits for the proposed US$1.4 billon Tia Maria mine, and the US$1.2 billion mine expansion at Toquepala, in the first quarter of 2015, Jacob says. Once up and running, these two mines will add 220,000 annual tonnes copper and 3,100 tonnes molybdenum to Southern Copper’s capacity. BMO’s Bukacheva expects concentrator startup at Toquepala and Tia Maria in early 2017.

The company anticipates completing the US$3.4 billion expansion at the Buenavista mine in the third quarter of 2015. This should add 308,000 tonnes copper and 4,600 tonnes moly a year to the company’s capacity.

Southern Copper expects to produce 782,000 tonnes of copper in 2015, Jacob says.

Commenting on the copper market, the mining executive notes the recent fall in prices resulted from the metal, used as a barometer for the global economy, tracking the six-year low in oil prices.

In late January 2015, copper prices fell to a five-and-half year low of US$2.42 per lb. for the March delivery on the Comex division of the New York Mercantile Exchange. It has rebounded since to open Feb. 5 at US$2.60 per lb.

Copper prices averaged US$3.12 per lb. in 2014, down 6.6% from 2013’s average of US$3.34.

Jacob projects the short-term demand for copper will consistently improve, on the back of the strengthening U.S. economy and higher demand expected from Western Europe. He believes structural factors, such as delays in project startups, technical difficulties, labour unrest and changes in tax regimes, will affect supply from new projects and existing operations, as well as scrap copper production. This, in his opinion, will reduce the market’s current oversupply, estimated at 300,000 tonnes this year.

“We believe the market will try to balance as we move on through 2015. We want to also emphasize that prices at current levels are not sufficient to promote the necessary future supply growth, thereby improving the strong long-term fundamentals of our industry.”  

Southern Copper recently approved a US$1 billion share repurchase program, and a dividend of US10¢ per share. It exited 2014 with US$400 million in cash and equivalents, down from US$1.6 billion, a year ago.