Southern Copper (SCCO), the largest mining company in Peru and Mexico and the fifth largest copper mining company in the world, reported mixed Q3 13 results last week. While the costs came in better than expected, copper output still remains a concern. However, despite weak shipments, lower than expected cash costs drove higher than expected EBITDA.
SCCO has the largest copper reserves among its peers. It has a strong balance sheet and operates low costs tier 1 assets with significant expansion potential. Although the company has failed to meets its expansion targets in recent years, SCCO will finally deliver some volume growth in 2014, but a persistently disappointing production this year remains an overhang on the stock.
2013 Continues To Be A Disappointment, Will 2014 Be Any Different?
The Phoenix, Arizona based company revised its previous production guidance; now expected to produce 650,000 tons of copper in 2014 and 869,000 tons in 2015. The new guidance implies 5-10% downgrades from previous guidance of 725,000 tons and 951,000 tons respectively. Although 2013 has been a consistent disappointment, SCCO said that it remains on track to deliver its growth projects on time and on budget. Buenavista's SXEW II, with an expected copper capacity of 120,000 tons per annum, is scheduled to start operations in the first half of 2014.
Southern Copper's Toquepala expansion in Peru is expected to increase average annual production by 100,000 tons of copper and 3,100 tons of molybdenum. SCCO continues negotiations with local communities and authorities as part of the process to obtain project approval. A public hearing on the proposed expansion is possible by end of this year or early next year. If the local communities approve then the EIA could be approved by the Peru minister of mines 30 days later. Construction cycle would be a two years. As mentioned earlier the brownfied expansion project is expected to add 100,000 tons of copper with capex of $1.05 billion.
Share Repurchase Program
SCCO Board of Directors recently approved an increase in its previously authorized buyback program from $1.0 billion to $2.0 billion. Previously approved $1.0 billion was almost exhausted and the extra $1.0 billion approved represents ~22% of free float. It is important to note that the fifth largest copper mining company in the world normally buys back strategically during lulls in the share price.
Valuation & Dividend
SCCO is trading at a premium to its peers. The company has a price/earnings ratio of 15.1, above industry average of 14.6 and Freeport-McMoRan Copper & Gold's (FCX) price/earnings ratio of 10.2. SCCO has a forward P/E of 17.4, compared to 12.1 of FCX. SCCO has a price/book ratio of 4.7, again higher than the industry average of 2.5 and 2.0 of FCX. Southern Copper has a price/sales ratio of 3.9, compared to 2.0 of FCX and industry average of 2.5. Finally, SCCO has a price/cash flow ratio of 13.6 vs. 9.8 of FCX and industry average of 13.3.
SCCO pays a quarterly dividend of $0.12 and has a dividend yield of 1.7%, lower than FCX dividend yield of 3.3% and industry average of 6.4%.
SCCO's large copper reserves, strong balance sheet, and expected high cash flows are all supportive of company's future growth. The company operates tier 1 assets with low costs and significant expansion potential. Although SCCO has historically paid strong dividends, the company reduced its dividend significantly this year and the company's dividend yield is expected to decrease further as there are no special dividends ahead and the company needs to continue investing in its expansion projects. A couple of other factors that concern us include risk of higher mining taxes in Mexico and Peru, and the fact that SCCO has failed to meet its expansion targets in recent years. We believe SCCO will finally deliver some volume growth in 2014, but a persistently disappointing production this year remains an overhang on the stock. Those investors who want to take an exposure in copper should look at FCX; we think FCX provides a better investment opportunity than SCCO.
You can read our articles on FCX on the following links: