Southern Copper's Q1: Weaker Operational Performance, Better Financial Results

Summary

• Southern Copper's copper, molybdenum, zinc, and silver production declined in Q1.
• The operating cash costs increased to $0.74/lb copper.
• Due to the improved metals prices, the revenues and net income improved in comparison to previous quarters.
• The balance sheet keeps on strengthening.

Photo by Funtay/iStock via Getty Images

Southern Copper (NYSE:SCCO) is another copper producer that benefited from high copper prices. Although its production declined in Q1 compared to the previous quarters, high copper prices pushed the revenues and net income to new highs.

Southern Copper's copper production declined to 476.8 million lb in Q1. It is 8.2% less than in Q4 and 1.5% less than in Q1 2020. The decline is attributable especially to lower copper grades at Southern Copper's Peruvian operations and the La Caridad mine. The molybdenum production declined too, to 14.4 million lb. It means a 4.7% decline compared to Q1, but almost no change in comparison to Q1 2020. The zinc production declined to 32.9 million lb, or by 1.9% compared to the previous quarter and by 14.6% compared to the same period of 2020. And the silver production declined too. In Q1, it amounted to 4.95 million toz, which is 8.5% less than in Q4 and 6.3% less than in Q1 2020.

Source: Own processing, using data of Southern Copper

Along with decreasing production volumes, the unit production costs increased. The operating cash cost grew from $0.67/lb in Q4 to $0.74/lb in Q1, or by 10.4%. However, the costs were 3.9% lower than in Q1 2020. The decline is attributable especially to higher by-product credits. Moreover, even at $0.74/lb, the operating cash costs remain well below Southern Copper's longer-term average that is somewhere above $0.8/lb.

Source: Own processing, using data of Southern Copper

Although the production and also sales volumes declined in comparison to the previous quarter, the metals prices improved notably. The average copper price grew from $3.25/lb in Q4 to $3.85/lb in Q1 or by 18.5%. The molybdenum price grew even by 25.3%, zinc price by 5%, and silver price by 7.3%. The positive impacts of higher metals prices outweighed the negative impacts of lower sales volumes. As a result, Southern Copper's revenues grew to $2.533 billion in Q1. It is 7.7% more than in Q4 and 47% more than in Q1 2020. Although the operating cash flow declined from $1.096 billion in Q4 to $782.6 billion in Q1, the net income improved by 29.4% to $763.8 million. The EPS climbed up to the $0.99 level.

Source: Own processing, using data of Seeking Alpha and Southern Copper

Southern Copper's cash position improved slightly. The company held $2.594 billion as of the end of Q4, but $2.683 billion as of the end of Q1. The total debt declined from $7.523 billion to $7.436 billion over the same time period. As a result, the net debt declined to $4.753 billion. Q1 2021 was the seventh consecutive quarter of declines in net debt. This all despite continuous investments in growth.

Source: Own processing, using data of Seeking Alpha and Southern Copper

Unlike many other copper producers, Southern Copper didn't experience such a steep share price growth. Moreover, over the last two months, the share price moved in a sideways channel. Therefore, Southern Copper's valuation metrics increased, but as can be seen in the chart below, they remain comparable to their longer-term averages. The price-to-revenues ratio stands at 6.33, the price-to-operating cash flow ratio stands at 18.01, and the price-to-earnings ratio stands at 26.28. The company is not cheap, but it wasn't cheap even before the start of the current copper bull market.

Source: Own processing

Southern Copper reported also some progress achieved at its numerous development projects during Q1. At the Buenavista Zinc project, the detailed engineering study approaches completion. The long-lead items have been ordered, and the mill is being shipped to the mine site. The construction should be completed by 2023. The new facilities should boost Southern Copper's zinc production by 200 million lb and copper production by 40 million lb per year.

At the Pilares project, an off-road facility for transportation of ore from the Pilares open pit to the La Caridad copper concentrator was completed. Pilares should start production in Q2 2022 and the projected capacity is 70 million lb copper. The El Pilar, El Arco, and Tia Maria projects didn't experience any major progress.

Southern Copper also declared its quarterly dividend. It amounts to $0.7 per share and it is payable on May 25, to shareholders of record as of May 11. At the current share price, the annualized dividend yield equals 4.03%, which is a very nice number.

Southern Copper's share price experienced a long growth period between March 2020 and February 2021. However, it was followed by a sideways movement that lasts until the present. In this case, a symmetrical triangle pattern is about to be completed. It indicates that a strong movement should arrive soon; however, it is not sure whether to the downside or to the upside. The RSI is around 50, and also the 10-day and 50-day moving averages don't provide any signals. The direction of the break-out will be highly dependent on the near-term direction of the copper prices.

What I like about Southern Copper's Q1:

• Revenues and net income increased.
• Net debt decreased.
• The development of Pilares and Buenavista seems to be progressing well.
• The dividend yield of more than 4% is very nice given the current standards.

What I don't like about Southern Copper's Q1:

• The copper, molybdenum, zinc, and silver production decreased.
• The copper production costs increased.
• The operating cash flow decreased.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[krauch023]

Your bar charts are very helpful. Good analysis. Thanks!

[davidbdc]

Solid quarter. Good to see balance sheet a bit stronger and an easy pathway for the needed investments over the next few years.

Can't beat SCCO for solid lower risk mining investment!

Thanks for the article.

[akhait]

I'm getting concerned about political risk... if Castillo wins, I expect less favorable conditions for mining companies. After all, he promised to focus on getting more "equitable" benefits for the country from mining.

[Peter Arendas]

@akhait I agree. The question is whether he really wins and whether he really makes some drastic moves against the mining industry. I understand that he wants more money for Peru, on the other hand, if he pushes too hard, it may damage the whole industry and it may lead to even less money for Peru.

[davidbdc]

@akhait
Yeah, but I've lived through several election cycles and there is always a leftist, marxist, socialist, etc claiming they will force the mining companies to pay through the nose. And then they get in office and realize that if they want any employment they can't actually do that much. Plus his party only has 30 of the 130 seats in Congress.

SCCO has successfully mined here for a LONG time. Castillo will be a bump in the road - he's totally unqualified to lead a country and being he doesn't have control of the Congress its doubtful he can enact much legislation. At best he gets some sort of minor tax increase. Being that SCCO invests heavily in Peru, they are likely already meeting his objective - which is 70% of profits are invested in Peru and 30% can leave.

The people in Peru that I know are sick of corruption. They aren't sick of solid mining companies providing good paying jobs.