- 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.
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.
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.
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.
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.
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.
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.
This article was written by
Peter Arendas is an associate professor at the University of Economics in Bratislava. He has over 15 years of investing experience. Peter specializes in covering small and mid-cap companies in the resource sector with an in-depth insight into the precious and industrial metals royalty & streaming industry.
Peter is the leader of the investing group Royalty & Streaming Corner where he offers in-depth analysis of long-only investment ideas, actionable research, model portfolios, discussions of the latest news, and direct access for questions in chat. Learn More.
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