Company Overview: Southern Copper Corporation (NYSE: SCCO) is a major integrated copper producer with the industry's largest copper reserves. It owns and operates mining and metallurgical plants in Mexico and Peru and conducts exploration in Argentina, Chile, Ecuador, Mexico, and Peru. Grupo Mexico SAB de CV, a Mexican conglomerate, owns SCCO to 88.9%.

SCCO Details

Key Takeaways from Q1FY22 (ended March 31, 2022)

• Growth in Revenue: In Q2FY22, the company's net sales amounted to USD 2.76 billion, representing a growth 9.13% increase year-over-year from USD 2.53 billion, resulting from higher market metal prices for all its products except silver, partially offset by a lower volume.
• Lower Operating Cash Cost: In Q2FY22, the operating cash cost amounted to USD 0.56 per pound of copper, a 24.9% improvement from USD 0.74 reported in Q2FY21, attributable to an increase in by-product revenue credits (+65.4%) driven by higher market prices, which was somewhat offset by the rise in production costs and the unit cost effect induced by a drop in pounds of copper produced.
• Improvement in Operating Income: SCCO reported an operating income of USD 1.47 billion increased 8.77% YoY to USD 1.35 billion representing 18-bps improvement in Operating margin.
• Increase in Net Income: The net income for Q2FY22 was USD 784.7 million vs. USD 763.8 million in Q2FY21, representing basic and diluted earnings per share (EPS) of USD 1.02.

Sales & Gross Profit Key Highlights; Analysis by Kalkine Group

Dividend and Capex Updates:

• During Q1FY22, SCCO stated that it made capital investments of USD 205.2 million, 11.8% higher than the Q2FY21 spends, and accounted for 26.2% of the Q2FY22 net income.
• On April 28, 2022, the company declared a quarterly dividend of USD 1.25 per common share, payable on May 31, 2022, to shareholders of record on May 17, 2021.

Other Key Findings in Q2FY21

• The company's copper production witnessed a QoQ decline of 10.0% to 23,922 tons in Q1FY22, lower production was primarily due to the shutdown of activities at Cuajone, which resulted in a reduction of 15,278 tonnes compared to 1Q21. The remaining difference can be attributed to lower ore grades and recoveries at our other facilities.
• Because of lower output from the Cuajone and La Caridad mines, molybdenum production fell 1.5 percent in 1Q22 compared to 1Q21. Mined zinc output fell 10.6% this quarter due to lower production at the Santa Barbara, Charcas, and San Martin units, attributed to a drop in processed material and lower average zinc grades. In the first quarter of this year, total mined silver production fell by 13.4%. Except for Buenavista, all mines had a decrease in production. The total output incorporates the significant impact of a stoppage at the Cuajone mine, which resulted in a 220,233-ounce reduction.

Balance Sheet & Liquidity Position

• Strong Cash Balance: The company exited FY21 with a cash balance (including short-term investments) of USD 3.49 billion, 34.50% more than USD 2.59 billion as of December 31, 2020.
• Cashflow from Operations: Operating cash inflow in FY21 was USD 4.29 billion vs. USD 2.78 billion in FY20.
• Stable Debt: As of December 31, 2021, its outstanding debt amounted to USD 6.55 billion, almost at par with USD 6.54 billion reported at FY20 end.

Key Metrics: In FY21, SCCO's operating and net margins were 55.5% and 31.1%, higher than the industry median of 20.1% and 14.1%, respectively. ROE stood at 44.2% at the end of FY21, an improvement from 22.4% for FY20. Its Debt/Equity ratio as of FY21 end was 0.80x, slightly lower than 0.91x as of FY20 end.

Profitability Metrics and Liquidity Profile; Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 91.70% of the total shareholding, while the top 4 constitute the maximum holding. Grupo Mexico SAB de CV and BlackRock Institutional Trust Company, N.A. hold the maximum stake in the company at 88.9% and 0.59%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis

• Metal Prices Risk: SCCO's financial performance is significantly dependent on the market price of metals, especially copper, molybdenum, zinc, and silver, which are highly volatile and can be affected by various factors such as economic and political downturns, a discrepancy in supply and demand, exchange rate fluctuations, etc.
• Capital Intensive Business: Exploration, exploitation, mining, smelting, and refining, machinery, and equipment maintenance, and so on all necessitate significant capital expenditures. As a result, if SCCO does not generate enough cash and liquidity to support its capital-intensive operation, it may suffer financial consequences.
• Dependence on Fuel, Gas, and Power: SCCO utilizes a substantial amount of fuel oil, electricity, water, and other resources in its operations, with fuel, gas, and power expenses accounting for roughly 28% of total production costs in FY20 and FY19. Any price hikes or supply shortages could harm the company's bottom line.

Valuation Methodology: Price/Earnings Per Share Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company's FY1 trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: Over the last month, SCCO corrected 16.76%. The stock is currently trading at lower end of its 52-week range of USD 54.92 to USD 83.29. We have valued the stock using the Price/Earnings multiple-based illustrative relative valuation method and arrived at a target price with an upside of low twenties (in percentage terms). We believe that the company can trade at a premium compared to its peer's average, considering the reduction in the cash cost, stable margins, and largest copper reserves. We have taken peers like Barrick Gold Corp (NYSE: GOLD) and Newmont Corporation (NYSE: NEM). Considering the robust fundamentals, favourable average realized prices, current valuation, and associated risks, we give a "Buy" recommendation on the stock at the closing price of USD 64.93, up 3.46% as of May 04, 2022.

SCCO Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors' appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the valuation has been achieved and subject to the factors discussed above.

Note 3: The report publishing date is as per the Pacific Time Zone.

Technical Indicators Defined

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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