Southern Copper (SCCO 0.30%) is planning to spend $2.3 billion on capital projects in 2014 as they work toward their goal of increasing production to 1.2 million tons by 2017 which represents an 87% increase over 2013 production.
Southern Copper plans to increase copper production from 670,000 tons in 2014 to 800,000 tons by 2015. The construction of the SX/EW III plant at Buenavista will allow production of 120,000 tons of copper per year which will be the main driver of increased production for 2015. Southern Copper is also expected to commence construction of their $1 billion Tia Maria project in the second half of 2014 once they receive necessary permits. Tia Maria is projected to produce 120,000 tons of copper per year once it is fully operational.
Does cash cover costs?
Southern Copper currently has $1.47 billion in cash and cash equivalents and $3.39 billion in total current assets as of the end of the first quarter. In 2013, Southern Copper earned $1.86 billion net cash from operating activities. With the average LME copper price roughly 11% lower in the first quarter of 2014 vs the first quarter of 2013, net income dropped from $495.4 million in the first quarter of 2013 to $323.4 million in the first quarter of 2014 . However, the good news is that copper production increased 9.2% in the first quarter compared to the same quarter last year. Sales actually decreased 4.2% due to a temporary buildup of inventory. Also hurting the bottom line, silver prices declined 32% since the first quarter last year and molybdenum prices declined by 12%.
Southern Copper anticipates that it will be able to meet its cash requirements for 2014 from cash on hand and internally generated funds. With Southern Copper anticipating a modest increase in production this year over 2013, and with significant cash on hand, this seems a reasonable assumption.
Another copper company focused on reducing debt
Southern Copper has long-term debt of $4.21 billion, which is substantially lower than rival Freeport-McMoRan (FCX 1.99%), which has long-term debt of $20.1 billion. This large amount of debt is due to its 2013 acquisitions of Plains Exploration Co. and McMoRan Exploration Co. which added oil and gas assets to Freeport-McMoRan's portfolio. Freeport-McMoRan is planning significant debt reduction with a goal of reducing debt to $12 billion by the end of 2016, which it hopes to achieve through cash flows generated above capital requirements and by deleveraging assets. Freeport-McMoRan has taken the first step toward deleveraging assets through its recent sale of its Eagle Ford shale assets to Encana Corp for $3.1 billion.
Foolish takeaway
Southern Copper has ambitious plans to increase production over the next few years. It appears that its plans are sustainable given its cash flow and money on hand. As production increases, it should be able to generate more cash flow, which should provide them with the necessary capital to further increase production without having to take on too much more debt, if any. Southern Copper is undergoing growth and spending while Freeport-McMoRan is trying to reign in their debt after undergoing significant expansion into the energy market. Fortunately, Freeport-McMoRan is generating a lot of cash and has plans to significantly reduce debt through cutting back spending and selling non-core assets.
