Southern Copper Corp. (SCCO, Financial) dropped nearly 3% to $53.02 per share after it released first-quarter financial and operating figures. However, in late morning trading on Thursday, it was up 1.28% to $53.70 a share.
The company reported a net profit of 61 cents per both basic and diluted share, up 48.8% from the prior-year quarter. It reported net income of $470.7 million, up 49.7% from 2017. Consensus was for an earnings per share of 60 cents. As a result, Southern Copper met expectations.
The net profit margin increased by 5.7 basis points to 25.6%. These increases in Southern Copper's bottom line and net margin were a consequence of higher base metals and silver prices, in addition to company cost control inittiatives.
The company reported adjusted earnings before interest, taxes, depreciation and amortization in the first quarter of 51.0% compared to 45.6% a year ago.
Earnings were backed on a revenue of $1.84 billion, which was a 16.2% growth from the analogous period of fiscal 2017. The company’s turnover increased as a result of higher prices on base metals. However, Southern Copper missed consensus on first-quarter revenues by about $6 million.
With 212,767 tons of copper placed on the market during the quarter, the company sold less volume of red metal compared to a year ago, which was -3.8%. The red metal was placed at an average price of $3.14 to $3.16 per pound. Copper business accounts were approximately 75 to 80% of total revenues.
Sales volumes were influenced by a lower quarterly volume of copper mined compared to a year ago (down 4.2%). Essentially, that was the result of lower ore grades of metal processed at the Buenavista SX-EW plant in Mexico. Among others, the company is studying solutions to improve blasting and avoid clogging from certain fine materials. Despite these operating improvements, the miner still expects a 30,000 tons reduction in the 2018 production of copper from Buenavista SX-EW plant in Mexico. Southern Copper hopes to completely offset it with 40,000 tons of the red metal that will come from Toquepala (Peru).
Therefore, the company provides a guidance 24,000 tons upside in the 2018 production of copper to 910,000 tons. In 2017, the miner produced 877,000 tons of the red metal. At Toquepala, the production ramp-up is expected to be achieved sometime during the third quarter of 2018.
Southern Copper also mines and sells molybdenum, zinc and silver. On a year-over-year basis, productions of molybdenum and zinc decreased 1.9% to 5,175 tons and 4.6% to 17,736 tons. The production of silver increased 3.9% to 4.143 million ounces. The company sold 5,243 tons of molybdenum, which was flat year-over-year, 26,391 tons of zinc, down 2.2% year-over-year, and approximately 4.26 million ounces of silver, which was up 0.2% from the prior-year quarter.
Molybdenum, zinc and silver together account for approximately 17 to 20% of total revenues.
Thanks to higher metal prices, Southern Copper increased the operating cash flow by 32.6% to $649.8 million in the first quarter of 2018 compared to a year ago. Approximately 46.4% of that was used for investing activities and about 35.7% for dividend payments. Net of exchange rate change effects for $52.2 million, the miner passed about $63.4 million cash to the liquidity available on hand. At the end of the first quarter, that amount, including securities, totaled $1.12 billion.
Southern Copper has properties and leachable materials valued $10.15 billion and long-term debt of $5.96 billion. The total equity is worth $6.4 billion. Considering a current market capitalization of $40.99 billion, the price-book ratio is 6.4 times towards an industry median of 2.06 times. After the first quarter of 2018, Ebitda computed over the last 12 months approximates $3.4 billion for an EV-to-Ebitda of 13.5 times versus an industry average of 9.9 times.
For the 52-weeks through April 25, the stock in Southern Copper has climbed 50% and the share price is above the 200 and 100 SMA lines. With reference to the 50 SMA line, the stock is trading slightly below. The 52-week range is $32.63 to $58.09 per share.
The recommendation rating is 3.5 of a total of 5. As of April, two of 12 analysts suggested buying the stock, five recommended holding the stock and one analyst thinks that now is the time to dispose of the stock. There are also four analysts who foresee an underperforming stock over the next 52-weeks of trading.
The average target price is $46.45 per share. That is a 12.4% stock depreciation from the current market valuation. The average target price is a mean of 10 analysts. The estimates range between a low of $39 and a high of $57 per share price target.
As of today, Southern Copper is not cheap. The investor hopes the share price will retreat a bit as copper futures, which are at -1.5% over the last five trading days to $3.151 per pound, keep on going down on a stronger U.S. dollar. The U.S. Dollar Index (DXY) increased by 1.7% over the last five days of trading to a current $91.2.
However, affirming a buying approach cannot be done without considering some short-term catalysts.
Some short-term catalysts include the following:
- In the second quarter of 2018, the miner hopes to successfully conclude the Peruvian Toquepala expansion project in Peru. From Toquepala, Southern Copper plans to add 100,000 tons of copper to the company’s annual production capacity. If everything goes as predicted, the annual copper production will reach 1 million tons.
- With investments at $77 million, Southern Copper aims to re-initiate operations at the San Martin mine in the Zacatecas Province of Mexico by the first quarter of 2019 and hopes to add 20,000 tons of zinc, 7,500 tons of copper and 2.8 million ounces of silver to the company’s annual production..
Concerning long-term catalysts, the investor who may want to add to its holding or start a position, should also know the following:
The Peruvian Michiquillay project in Cajamarca, acquired by Southern Copper in February for $400 million will start to deliver in 2025 at a pace of a yearly production of copper of 225,000 tons over more than 25-years of the initial life of the mine. Southern Copper Product expects to strengthen its leadership as a low-cost producer, since at Michiquillay the red metal will be produced at a competitive cash-cost. The claim represents copper resources of 1.15 billion tons at a 0.63% grade. Here, the company will also produce molybdenum, gold and silver as secondary products. To bring the project to production, the company estimates to invest about $2.5 billion.
In addition, the company reported that on April 19, its board of directors authorized a dividend of $0.30 per share payable on May 23 to shareholders of record at the close of business on May 9.
(Disclosure: I have no positions in any security mentioned in this article.)
