Source: SCCO Presentation
Investment Thesis
Southern Copper (NYSE:SCCO) is a majority-owned, indirect subsidiary of Grupo Mexico S.A.B. de C.V.
As of December 31, 2020, Grupo Mexico, through its wholly-owned subsidiary Americas Mining Corp (AMC), owns 88.91% of the Company’s capital stock. The company operates the mining, smelting, and refining facilities in Peru and Mexico (See picture below). Southern Copper also conducts exploration activities in Argentina, Chile, and Ecuador.
Source: Presentation March 2021
On January 25, 2021, SCCO reported fourth-quarter 2020 earnings of $0.76 per share, which beat analysts' expectations. The rise is due to the higher price of copper and other metals, as you can see later in this article.
The Company is an integrated producer of copper, representing ~82% of the revenue, and other metals (molybdenum, silver, and zinc). It owns the World's largest Copper reserves.
Source: Presentation
Southern Copper is the second copper company that I cover on Seeking Alpha after Freeport-McMoRan (FCX). I recommend reading my article on FCX published on January 27, 2021.
SCCO has regularly followed the Global X Copper Miners ETF (COPX), with an increase of 59% in one year. However, Freeport-McMoRan outperformed significantly with a 134% increase on a one-year basis.
The investment thesis is slightly turning bearish for SCCO. The stock has reached a high valuation due to the copper price momentum, which is now fading a little.
I would certainly not start a new position now, even if I still believe that the fundamentals are strong. Instead, I recommend selling about 50%-60% of your position above $74 and wait patiently for a healthy retracement at or below $66.
The Copper Market Is Strong, but Signs of Weakness Are Emerging
According to Anna Golubova (Kitco news), on March 11, 2021:
Copper headlines have been everywhere lately, with the economic recovery and a move toward green technology boosting prices to 9.5-year highs. But that excitement will start to fade, according to CRU director of base metals research and strategy Vanessa Davidson, who is projecting a peak in prices as soon as Q2.
She is not the only analyst who is expecting some fading. On March 26, Fitch warned that signs are emerging of weakness in copper price:
However, we note that prices have edged lower since their late February high. Bullish underlying factors for copper have started to fade and we see this continuing into 2021. We therefore see prices trending lower from current levels on a six-to-nine-month horizon.
Copper prices have reached the 2011-2012 level now. A sign of a peak is that "Fitch has seen a 29.9% year-on-year decline in the number of net long positions since February."
In this condition, it is hard to believe that SCCO stock can continue to climb higher in 2021, and we may be trading close to a top as we speak.
Southern Copper - 4Q 2020 - Balance Sheet and Trend - The Raw Numbers
| Southern Copper | 4Q'19 | 1Q'20 | 2Q'20 | 3Q'20 | 4Q'20 |
| Total Revenues in $ Million | 1,854.6 | 1,719.7 | 1,785.4 | 2,129.1 | 2,350.7 |
| Net Income in $ Million | 305.6 | 214.8 | 259.5 | 506.0 | 590.1 |
| EBITDA $ Million | 794.7 | 726.6 | 774.3 | 1,128.7 | 1,258.4 |
| EPS diluted in $/share | 0.40 | 0.28 | 0.34 | 0.65 | 0.76 |
| Cash from Operations in $ Million | 541.4 | 475.1 | 419.3 | 793.5 | 1,095.6 |
| Capital Expenditure in $ Million | 171.4 | 101.0 | 113.3 | 134.5 | 243.4 |
| Free Cash Flow in $ Million | 370.0 | 374.1 | 306.0 | 659.0 | 852.2 |
| Total Cash $ Million | 2005.8 | 2092.3 | 1839.5 | 2176.1 | 2,594.4 |
| Total Long term Debt in $ Million | 6940.8 | 6941.8 | 6542.6 | 6543.4 | 6,544.2 |
| Dividend $/sh | 0.40 | 0.20 | 0.40 | 0.50 | 0.60 |
| Shares outstanding (diluted) in Million | 773.1 | 773.1 | 773.1 | 773.1 | 773.1 |
Source: Southern Copper 10K filing
Note: More data (production) are available for subscriber-only.
Analysis: Revenues, Free Cash Flow and Copper/Silver/Molybdenum Production
1 - Revenues were $2,129.1 million for the third quarter of 2020
Southern Copper’s adjusted earnings per share were $0.76 per share, and revenues were $2.35 billion. The company beat analysts' expectations due to greater sales volumes and higher silver and copper prices.
4Q'20 adjusted EBITDA was $1,254.1 million, an increase of 59.4% compared to $786.7 million in 4Q'19. The adjusted EBITDA margin was 53.3% compared to 42.4% the preceding year. Total operating costs increased 5% year over year to $1,284 million.
Southern Copper reported earnings per share of $2.03 in 2020, up 6% from $1.92 in 2019, beating analysts' expectations.
2 - Free cash flow was back to a record of $852.2 million in the fourth quarter of 2020.
Note: I calculate the generic free cash flow using the cash from operating activities minus CapEx.
2020 free cash flow was $2,191.3 million, with $852.2 million in 4Q'20.
The company raised the quarterly dividend to $0.60 per share in Q4 or a yield of 3.36%, justified by the free cash flow.
3 - Net debt was $3.95 billion on December 31, 2020 - a decrease of $407 million from the prior quarter.
On December 31, 2020, SCCO had $2.59 billion in consolidated cash and Long-term debt of $6.54 billion.
The total debt/total assets ratio for 2020 was 0.39 compared to 0.42 in 2019.
4 - Production analysis - Copper Cu, Silver-Ag, and Molybdenum Mo.
Note: The weight in metric tons is equal to the pounds multiplied by 0.000454.
| Price | 3Q'19 | 4Q'19 | 1Q'20 | 2Q'20 | 3Q'20 | 4Q'20 |
| Copper price realized - Cu (Comex) $/Lbs | 2.62 | 2.72 | 2.57 | 2.43 | 2.94 | 3.26 |
| Silver price Realized - Ag | 16.98 | 16.16 | 16.87 | 16.54 | 24.59 | 24.50 |
| Molybdenum price realized - Mo $/Lbs | 11.76 | 11.27 | 9.56 | 8.24 | 7.57 | 8.93 |
| Zinc price $/Lbs | 1.06 | 1.16 | 0.97 | 0.89 | 1.06 | 1.19 |
Copper Production for 4Q'20 was 572.6 Cu Mlbs, up 1.3% from the same quarter a year ago and up 4.8% sequentially. The copper price realized was $3.26 per Lbs (see table above).
Note: Production including 3rd party concentrate was 586.2 Cu Mlbs.
Raul Jacob Ruisanchez - Vice President, Finance, Treasurer, and Chief Financial Officer - said in the conference call:
Now, let us focus on the copper market, the core of our business. In the fourth quarter of 2020, the London Metal Exchange copper price averaged $3.25 per pound, that is up 21.7% higher than the price that we had in the fourth quarter of 2019. As of today, we are seeing prices a little bit over $3.60 per pound, which pose a positive outlook for the 2021 copper market. We believe the following factors are influencing the copper market.
Conclusion and Technical analysis
It was an excellent quarter for Southern Copper and its lucky shareholders, but all signs point to a peak in stock price appreciation. It comes to a matter of investing strategy.
In my opinion, it is the best time to take the capital invested out with some profits and leave the rest in the game.
However, copper will be an essential metal, and Fitch forecasts average global copper consumption growth of 1.8% over 2021 to 2030, which will support high copper's price. Finally, over the longer term to 2030, Fitch also expects that the copper market will remain "in a market deficit, as consumption growth remains strong, driving prices higher."
In conclusion, I do not see a massive retracement from here, but it is likely that the stock will slowly surrender to the financial gravity and starts dropping a little from those hefty levels.
Technical Analysis
SCCO forms a descending triangle pattern with line resistance at $74 and line support at $68. Descending triangles are generally bullish when they are entered from the support side, which is the case here.
It means that SCCO is likely to break out and retest the 80's at one point. However, I believe any uptick above $74 is an opportunity to take profits and wait for a retracement below $68.
If the copper price turns bearish for any reason, SCCO could eventually retest the 200MA around $58-$56.
Author's note: If you find value in this article and would like to encourage such continued efforts, please click the "Like" button below as a vote of support. Thanks!
Join my "Gold and Oil Corner" today, and discuss ideas and strategies freely in my private chat room. Click here to subscribe now.
You will have access to 57+ stocks at your fingertips with my exclusive Fun Trading's stock tracker. Do not be alone and enjoy an honest exchange with a veteran trader with more than thirty years of experience.
"It's not only moving that creates new starting points. Sometimes all it takes is a subtle shift in perspective," Kristin Armstrong.
Fun Trading has been writing since 2014, and you will have total access to his 1,988 articles and counting.
