Southern Copper Corporation

News & Events

2023-03-29 12:19:00 ET

Summary

• On February 3, 2023, Southern Copper Corporation reported fourth-quarter and full-year 2022 earnings of $1.17 per share on a net sale of $2,820.3 million, beating analysts' expectations.
• Copper Production for 4Q22 was 531.9 Cu M lbs and 532.3 Cu M lbs, including third party (sold 512.7 M lbs). The copper price was $3.63 per Lb in 4Q22.
• I recommend buying back and accumulating Southern Copper Corporation at or between $72.2 and $70.5, with potential lower support at $66.

Introduction

The Phoenix-based Southern Copper Corporation ( SCCO ) is a majority-owned, indirect subsidiary of Grupo México, S.A.B. de C.V. ( GMBXF ).

As of December 31, 2022, Grupo Mexico, through its wholly-owned subsidiary Americas Mining Corp ("AMC"), owns 88.91% of its capital stock.

The company is an integrated producer of copper, representing about 77% of the revenue in 2022, and other metals (mainly molybdenum, silver, and zinc).

Note: This article is an update of my article published on December 23, 2022. I have followed SCCO on Seeking Alpha since January 2021.

The company operates mining operations, smelting, and refining facilities in Peru and Mexico (See picture below). SCCO copper reserves are 44.8 MMT as of December 2022. Production cash cost was $0.78 per pound, leaving a comfortable profit margin.

From the most recent company December presentation, Southern Copper also conducts exploration activities in Argentina, Chile, and Ecuador.

1 - Summary

On February 3, 2023, SCCO reported fourth-quarter and full-year 2022 earnings of $1.17 per share on a net sale of $2,820.3 million, beating analysts' expectations. Revenues were about the same as the prior-year quarter.

The revenues for copper were $7,737 million in 2022, or 77% of the total revenues, as shown below:

Cash flow from operating activities in 4Q22 was $1,081.9 million, representing a decrease of 11.9% over the $1,227.7 million posted in 4Q21.

An essential element to consider: Southern Copper Corporation owns the world's largest copper reserves at 42.4 MMT. SCCO's total production is expected to be 1.6 M tons by 2032, with a cash cost of $0.78 per pound in 2022.

2 - Stock performance

Southern Copper is the second copper company I cover at Seeking Alpha, after Freeport-McMoRan Inc. ( FCX ).

I strongly recommend reading my most recent article on Freeport McMoRan, published on February 28, 2023, by clicking here.

Both companies have recovered significantly from July-August 2022 lows due to a significant drop in the copper price and lingering fear of recession.

However, the miners have turned around since October, and SCCO is down 7% YoY, outperforming FCX and COPX.

3 - Investment Thesis

Southern Copper and Freeport McMoRan are two solid copper companies in terms of balance sheets that pay generous dividends.

The main difference between FCX and SCCO is that the latter is not producing significant gold and, thus, is more correlated to copper price fluctuation. The copper price is down approximately 14% YoY despite recovering from a low in July/August last year.

The outlook for copper is still uncertain, even if the market is pushing for a bullish future. The copper price has increased significantly since the low in July but is now plateauing just below $4.20 per pound and is slowly retracing.

The copper market is expected to experience another volatile 2023 as the base metal will be caught between a possible painful global recession and the shift to green energy with rising demand for EVs. The possible China re-opening helped earlier this year but is fading away now.

Investors are continuing to monitor the extent of improved Chinese purchasing after the country’s economic reopening, as new home sales grew for a third straight week in 16 major cities. Industrial demand is also expected to pick up as the government is set to announce further stimulus measures at its National People’s Congress in March.

In the conference call , CFO Raul Jacob said:

let me say that 2022 was a very challenging year for us. We have faced some difficulties in the economies where we operate, which has tested our strengths and ability to operate at competitive terms. On top of lower metal prices and inflation, we had to deal with the 54 days Cuajone stoppage in the first half of 2022. Nonetheless, we have persevered bolstered by the resilience of our workforce, SCC's strength and our strong financial position.

One lingering issue for Southern Copper is its substantial presence in Peru which I have discussed above. Caution here.

Thus, long-term investors should continue accumulating this highly cyclical stock on any significant weakness. But, due to extreme volatility in the copper demand, I recommend short-term trading LIFO. About 30% to 40% should be allocated to this task to minimize the risks of a sudden severe retracement that can happen without warning.

Southern Copper - 4Q22 - Balance Sheet and Trend History - The Raw Numbers

Southern Copper	4Q21	1Q22	2Q22	3Q22	4Q22
Total Revenues in $ Million	2,823.7	2,763.8	2,306.9	2,156.9	2,820.3
Net income in $ Million	832.9	784.7	432.3	519.0	902.4
EBITDA $ Million	1,728.5	1,683.0	1,025.7	1,025.7	1,649.8
EPS diluted in $/share	1.08	1.02	0.56	0.67	1.17
Cash from Operations in $ Million	1,227.7	820.7	309.9	590.1	1,081.9
Capital Expenditure in $ Million	196.8	205.2	224.6	227.9	290.9
Free Cash Flow in $ Million	1,030.9	615.5	85.3	362.2	791.0
Total cash $ Million	3,488.9	3,253.7	2,355.7	2,184.8	2,278.06
Total Long-term Debt in $ Million	6,547.6	6,548.5	6.549.4	6,550.3	6,251.2
Dividend $/sh	1.00	1.25	0.75	0.50	1.00
Shares outstanding (diluted) in Million	773.1	773.1	773.1	773.1	773.1

Source: Southern Copper release .

Note: More data (production) is available for subscribers.

Analysis: Revenues, Free Cash Flow, and Copper/Silver/Molybdenum Production

1 - Revenues were $2,820.3 million for the fourth quarter of 2022

Southern Copper's earnings per diluted share were $1.17 per share, and revenues were $2.820 billion. The 4Q22 adjusted EBITDA was $1,647.5 million, which represented a decrease of 4.6% from the $1,726.5 million registered in 4Q21.

4Q22 net income was $902.4 million, representing an 8.3% increase compared to the $832.9 million in 4Q21.

On January 26, 2023, the Board of Directors authorized a $1.00 per share or a yield of 5.42%.

SCCO is considered a low-cost operation with a cash cost per pound of $0.78 net of by-products or $2.02 per pound in 2022. It left a 44% profit margin in 2022.

2 - Free cash flow was $791 million in the fourth quarter of 2022

Note: I calculate the generic free cash flow using the cash from operating activities minus CapEx.

Trailing 12-month free cash flow was $1,854 million, with $791.0 million in 4Q22.

3 - Net debt was $4.27 billion on December 31, 2022

4 - Production analysis - Copper-Cu, Silver-Ag, and Molybdenum-Mo.

Note: The weight in metric tons is equal to 2,204.6 pounds

Price	4Q21	1Q22	2Q22	3Q22	4Q22
Copper price realized - Cu (Comex) $/Lbs	4.40	4.53	4.32	3.51	3.63
Silver price Realized - Ag $/oz	23.36	24.05	22.65	19.10	21.25
Molybdenum price realized - Mo $/Lbs	18.53	18.99	18.30	16.00	21.17
Zinc price $/Lbs	1.53	1.70	1.78	1.48	1.36
Gold $/oz	1,795	1,874	1,872	1,728	1,729

Copper Production for 4Q22 was 531.9 Cu M lbs and 532.3 Cu M lbs, including third party (sold 512.7 M lbs). The copper price was $3.63 per Lb in 4Q22 (see table above).

Higher sales volumes primarily drove revenues for copper, silver, and zinc. However, molybdenum sales volumes dropped this quarter.

Also, molybdenum prices increased by 14.2% during the quarter, whereas prices dropped for copper, silver, and zinc, as shown in the table above. In the press release:

Mined silver production increased 9.6% in 4Q22, driven upward by higher production at our IMMSA, Buenavista and Cuajone operations. Molybdenum production decreased (-15.6)% in 4Q22 compared to 4Q21, which was primarily attributable to lower production at the Toquepala mine. Mined zinc production decreased 7.4% this quarter, mainly due to a drop in production at the Charcas unit.

Technical Analysis and Commentary

Note: The chart is adjusted for the dividend.

SCCO forms an ascending triangle pattern with resistance at $76 and support at $72.

Ascending triangle patterns are bullish. They indicate that the SCCO price will likely climb higher as the Apex pattern closes. RSI is 55 and shows a potential retest of the strong resistance soon.

The overall strategy I usually promote in my marketplace, "The Gold and Oil Corner," is to keep a small core long-term position and use about 40%-50% to trade LIFO while waiting for a higher final price target to sell your core position. The task is more painless, knowing that SCCO pays a quarterly dividend of $1.00 per share.

I recommend selling about 40%-50% of your position LIFO (assuming a profit, never sell at a loss) between $75 and $76 with possible higher resistance at $78 if the copper price turns bullish well above $4.25 in 2023, which is not probable due to the FED' hawkish action pushing the world economy into a brutal recession and bank turmoil.

Conversely, I recommend buying Southern Copper Corporation back and accumulating at or between $72.2 and $70.5, with potential lower support at $66.

Also, it is crucial to closely follow what is happening in Peru, which represents a large part of the SCCO's revenues. I said recently in my article about BVN:

However, the political instability in Peru is a concerning risk that cannot be eliminated when adopting your investing BVN strategy. The risk of production hiccups and violent protests in Peru is elevated and should not be taken lightly, even if BVN mining facilities performed normally.

Warning: The TA chart must be updated frequently to be relevant. It is what I am doing in my stock tracker. The chart above has a possible validity of about a week. Remember, the TA chart is a tool only to help you adopt the right strategy. It is not a way to foresee the future. No one and nothing can.

For further details see:

Southern Copper: It Is All About Copper Prices