Southern Copper Corp. (SCCO, Financial) fell 3.44% to $35.91 per share on Oct. 24 after reporting third-quarter results.Â
With net earnings of 48 cents per share, the copper miner missed consensus estimates by 6 cents, producing a negative surprise of 4%. Earnings declined 7.7% from the year-ago quarter due to lower metal prices.
Net earnings were backed by $1.72 billion in revenue, which grew 2.4% year over year. Despite lower commodity prices, quarterly sales were higher because the company sold more copper, zinc, silver and molybdenum. Regardless, the company missed revenue expectations by $40 million.
The adjusted earnings before interest, taxes, depreciation and amortization margin also scared investors away from the stock. The margin declined 110 basis points to 50.4%.
Copper mine production grew 1.1% to 223,921 tons as a result of better ore grades at the Toquepala and Cuajone mines in Peru. Molybdenum production increased 6.9% to 5,759 tons, reflecting improved output at the Buenavista mine in Mexico and better ore grade at Toquepala. Zinc production decreased 4.9% to 17,469 tons. Silver production increased 1.4% to 4.23 million ounces thanks to better ore grades at Toquepala.
The company is progressing well on cost control efficiencies, resulting in operating cash flow growth of nearly 40% to about $1.8 billion in the first nine months of the year. Higher byproduct revenues also underpinned the growth. Funds used as capital expenditures stood at $831.8 million over the same period. This means the resulting free cash flow was $1 billion.
The share price at market close on Wednesday is far below the 200-, 100- and 50-day simple moving average lines following a 17% decline for the 52 weeks through Oct. 24. Wednesday's closing price of $35.91 is 5 cents off the 52-week low of $35.85 and more than 60% below the 52-week high of $58.09. The market capitalization is approximately $27.8 billion.
The price-book ratio is 4.26 versus an industry median of 1.74. The 14-day relative strength index is 22.03, suggesting it is oversold.
The recommendation rating is 3.4 out of 5 and the average target price is $45.86. The average target is a nearly 30% upside from the stock's closing price on Wednesday.Â
In addition, the company will distribute a quarterly cash divendend of 40 cents on Nov. 21. The quarterly distribution is leaning toward a forward dividend of $1.6 per ordinary share, granting a 4.3% yield as of Oct. 24.
At this level, Southern Copper is beating the current yield on the S&P 500 index and is almost on par with the yield of high-quality market (HQM) bonds, representing the corporate loans issued by triple-A, double-A and single-A rated companies. The monthly spot rate on 10-year corporate bonds is 4.18%.
As a result of achieving full capacity at the concentrator of the Toquepala asset and the restart of operations at the San Martin mine in Mexico, the company is targeting significant output growth that, combined with third-quarter metal prices, should deliver higher sales.
The only concern is the price of copper, the miner's main commodity. Hopefully, Southern Copper is right on target with its prediction on a recovery in copper prices despite fears about the trade war between the U.S. and China.
Disclosure: I have no positions in any securities mentioned in this article.
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