Company Overview: Southern Copper Corporation (NYSE: SCCO) is a leading integrated copper producer with the largest copper reserves in the industry. It operates mining units and metallurgical facilities in Mexico and Peru and is also engaged in exploration activities in Argentina, Chile, Ecuador, Mexico, and Peru. SCCO is 88.9% owned by the Mexican conglomerate Grupo Mexico SAB de CV.

SCCO Details

Key Takeaways from Q2FY21 (ended June 30, 2021)

• Robust Growth in Revenue: In Q2FY21, the company's net sales amounted to USD 2.90 billion, representing a robust 62.3% increase year-over-year from USD 1.79 billion, resulting from higher market metal prices for all its products.
• Lower Operating Cash Cost: In Q2FY21, the operating cash cost amounted to USD 0.59 per pound of copper, an 11.5% improvement from USD 0.66 reported in Q2FY20. These figures include by-product revenue credits, which were higher during the current quarter.
• Improvement in Adjusted EBITDA: SCCO reported an adjusted EBITDA of USD 1.86 billion for the current quarter, representing a higher adjusted EBITDA margin of 64.3% vs. 43.1% for Q2FY20.
• Increase in Net Income: The net income for Q2FY21 was USD 932.7 million vs. USD 259.5 million in Q2FY20, representing diluted earnings per share (EPS) of USD 1.21.

Sales & Gross Profit Key Highlights; Analysis by Kalkine Group

Recent Developments:

• On July 22, 2021, the company's board declared a dividend of USD 0.90 per share, which was paid on August 26, 2021, to shareholders of record on August 12, 2021.
• The company devised an aggressive capital investment program and invested USD 10.6 billion in the last decade, intending to push business growth. The result of this program is visible in terms of over 109% increase in its copper production in these ten years and 49% and 70% increase in molybdenum and silver production, respectively.
• During Q2FY21, SCCO stated that it made capital investments of USD 219.8 million, 94.0% higher than the Q2FY20 spends, and accounted for 23.6% of the Q2FY21 net income.

Other Key Findings in Q2FY21

• The company's copper production witnessed a 6.3% decrease to 237,110 tons in Q2FY21 from 253,097 tons in Q2FY20, owing to a fall in ore grades from the rescheduling of stripping and maintenance works (postponed to this year from FY20 due to the COVID 19 pandemic).
• In terms of by-products, mined zinc production was 8.9% higher during Q2FY21, resulting from increased Charcas mine and San Martin mine productions in Mexico. Molybdenum production fell 10.8% in Q2FY21 (from Q2FY20) due to a lower Toquepala mine (Peru) and Buenavista mine (Mexico) productions. On the other hand, mined silver production fell 16.1% in Q2FY21.

Balance Sheet & Liquidity Position

• Strong Cash Balance: The company exited Q2FY21 with a cash balance (including short-term investments) of USD 2.94 billion, 13.3% more than USD 2.59 billion as of December 31, 2020.
• Cashflow from Operations: Operating cash inflow in Q2FY21 was USD 1.06 billion vs. USD 419.3 million in Q2FY20.
• Stable Debt: As of June 30, 2021, its outstanding debt amounted to USD 6.55 billion, almost at par with USD 6.54 billion reported at FY20 end.

Key Metrics: In Q2FY21, SCCO's operating and net margins were 57.8% and 32.1%, higher than the industry median of 26.4% and 15.6%, respectively. ROE stood at 12.1%, an improvement from 3.8% for Q2FY20. Its Debt/Equity ratio as of Q2FY21 end was 0.83x, slightly lower than 0.87x as of Q1FY21 end.

Profitability Metrics and Liquidity Profile; Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 91.95% of the total shareholding, while the top 4 constitute the maximum holding. Grupo Mexico and BlackRock Institutional Trust Company, N.A. hold the maximum stake in the company at 88.9% and 0.56%, respectively

Risk Analysis

• Volatile Metal Prices: SCCO's financial performance is substantially dependent on the market price of metals, especially copper, molybdenum, zinc, and silver, which are highly volatile and can be affected by various factors such as economic and political downturns, a discrepancy in supply and demand, exchange rate fluctuations, etc.
• Capital Intensive Business: The exploration, exploitation, mining, smelting & refining, machinery & equipment maintenance, etc., require huge capital investments. Therefore, if SCCO fails to generate enough cash and liquidity to promote its capital-intensive business, it may negatively impact its financial standing.
• Dependence on Fuel, Gas, and Power: SCCO uses fuel oil, electricity, water, and other resources in significant quantities in its operations, and fuel, gas, and power costs accounted for around 28% of its total production cost in FY20 and FY19. Any increase in their prices or a supply shortage could affect the company's results of operations.
• Speculative Nature of Business: The exploration of metals is extremely speculative, and the discovery of mineralization is never guaranteed. And in instances when minerals are found, it requires various years from the beginning (drilling and exploitation) until production is conceivable, which requires a tremendous amount of capital.

Outlook

• Looking forward, SCCO expects to produce a total of 960,000 tons of copper in FY21.
• At the El Arco Project located in Baja California, Mexico, the company's annual production estimates for FY21 are 190,000 tons of copper and 105,000 ounces of gold, with an expected capital budget of USD 2.9 billion.
• This will be further aided in the future by the initiation of construction activities at the Tia Maria Project in Peru, beginning operations at the Buenavista Zinc Project in Mexico (expected in FY23), and the commencement of production from the Pilares and El Pilar Projects, Mexico (expected in Q1FY22 and FY23, respectively).

Valuation Methodology: Price/Earnings Per Share Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company's NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: Over the last six months, SCCO corrected ~16.07%. The stock is currently at the mid-point of its 52-week range of USD 43.29 to USD 83.25. We have valued the stock using the Price/Earnings multiple-based illustrative relative valuation method and arrived at a target price with an upside of low double digits (in percentage terms). We believe that the company can trade at a premium compared to its peer's average, considering the tremendous surge in the top and bottom line, higher profit margins, market leader position, and largest copper reserves. We have taken peers like Freeport-McMoRan Inc. (NYSE: FCX) and Newmont Corporation (NYSE: NEM). Considering the robust fundamentals, positive outlook, current valuation, and associated risks, we give a "Buy" recommendation on the stock at the closing price of USD 62.34, up ~2.58% as of September 15, 2021.

SCCO Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors' appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined

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Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavorable movement in the stock prices.

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