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PrintNot surprisingly, higher copper prices made for a very strong first quarter at Southern Copper SCCO. Sales jumped 96% versus the prior-year period (LME copper prices gained 111%) and the firm's consolidated EBITDA margin widened 21 percentage points to 57%. Sales didn't increase on a one-for-one basis with prices due to lower copper volumes, a function of lower grades at the company's Peruvian mines and at La Caridad (which was expected).
Lower grades also pushed operating costs higher: unit costs before byproduct credits came in at $1.50/lb for the quarter versus $1.29/lb in the prior year. But incorporating the effects of byproduct sales, operating cash costs improved significantly thanks primarily to robust molybdenum prices (81% increase year over year). By this measure (a better means to assess the economic cost of extraction and processing), unit costs declined from $0.60/lb to negative $0.15/lb. In other words, the value Southern Copper received from selling byproduct metals like molybdenum, zinc, and silver exceeded the cost of copper production. This result bested even the heady days of the first quarter of 2008, when unit costs including byproduct credits were a negative $0.13/lb.
Aside from operating results for the quarter, we were pleased to hear the situation at Cananea seems to be progressing (albeit incredibly slowly). Management announced that on April 21, the Mexican Supreme Court dismissed the workers' appeal of the Feb. 11 Federal Court ruling in favor of Southern Copper. This should clear the way for the company to regain access to the highly profitable mine.
Finally, it's worth mentioning Southern Copper's April 16 issuance of $1.5 billion in debt, proceeds from which are intended to accelerate the company's $2.8 billion expansion program, which would add 750 million pounds of copper and nearly 15 million pounds of molybdenum to the company's annual production capacity, representing 50% and 36% increases, respectively, versus current capacity. Given the $698 million in EBITDA Southern Copper generated in this quarter alone, we doubt the company will have any difficulty in generating cash to fully fund the plan--even without the debt issuance.
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