Southern Copper Stock: Global Leader Poised To Exploit Clean Energy Boom (NYSE:SCCO)

I coated Southern Copper Company (NYSE:SCCO) simply over a 12 months in the past, once I rated the inventory a maintain – citing considerations with falling commodity costs and potential to overlook earnings targets. The inventory is up about 60% since then. I am once more ranking the inventory a maintain – however for various causes this time round.

One of the worthwhile and resource-rich mining firms on the earth, SCCO is up nearly 30% prior to now 12 months, affords a robust dividend, and is well-positioned long-term with demand for the purple metallic projected to considerably outstrip provide amid the worldwide inexperienced transition. The inventory additionally seems enticing within the near-term with copper costs in bounce-back mode whereas a big quantity of provide may very well be taken offline if First Quantum, which accounts for greater than 1% of worldwide copper provide, is compelled to stall or halt production at its flagship mine in Panama.

Southern Copper is a tempting inventory to leap on however it simply is not at a really perfect worth for brand spanking new buyers. The worth of copper must common about $4.50/lb for many of the subsequent decade to justify the present inventory worth. Therefore, I price it a maintain.

Properly-Positioned Revenue Machine

Southern Copper at present leads the world in copper reserves, is quantity 2 in assets, and is available in fifth by way of annual manufacturing, which is cut up between Mexico (60%) and Peru (40%).

The corporate can be environment friendly, with the bottom money prices within the trade, permitting it to ship substantial working earnings and money flows over the previous decade. EBIT margin at present sits at 45% and levered money movement at 22%. Because of this it has garnered an A+ profitability grade, blowing away the sector median. To not point out it has delivered robust dividends constantly with a yield that now sits at over 5% whereas rising at a CAGR of over 30%.

Southern Copper’s revenue margins by each measure are wherever from 100% to over 500% above the sector median. within the trailing twelve months the corporate noticed an EBIT margin of 45% and EBITDA a jaw-dropping 53 p.c, whereas levered free money movement is at 27% and ROTC 20%.

Southern Copper’s profitability marks additionally blow away its friends, because the desk exhibits under. Discover that its inventory worth efficiency leads the pack of high pure play copper rivals as properly, though its P/E and EV/EBITDA valuation ratios are of concern, which we will dig into.

SCCO plans to spice up manufacturing by 80% to achieve 1.6mln tons in 2023. This may require some heavy capex funding alongside the best way at a mean of virtually $2 billion per 12 months (assuming Cu worth of $3.85/lb).

The Copper Clear Power Increase Cometh

In accordance with the IEA’s mid-range forecast, annual copper demand might attain 34mln tons by 2035, about 35% above 2022 ranges. Electrical energy networks will account for almost 50% of this 8.8mln ton rise in demand, with EV batteries accounting for 25%. Clear vitality tech necessities as a % of complete demand will shift from 22% in 2022 to 40% by 2035.

Maybe extra crucial relating to future costs, is that copper shortages might attain as excessive as 10mln tons/12 months by 2035, per an S&P report final 12 months. The scarcity forecasts have up to now didn’t spark the extent of funding that will likely be wanted to return near closing the hole. Nevertheless, S&P projected that the anticipated vital deficits could not start hitting till 2027. Annual surpluses starting from 200mln to 300mln tons are anticipated in 2024, 2025, and 2026.

The

International Copper Study Group (ICSG), in the meantime, is projecting an excellent larger surplus for 2024 – of 400mln tons – though it expects demand to rise 2.7%.

Regardless of the projected surpluses, consensus price forecasts – as of the tip of September – have copper rising yearly till it reaches $4.32/lb in 2027, about 12% above the YTD worth of $3.85/lb.

Copper costs have just lately rebounded, now up 5% prior to now 12 months, and are outperforming different key inexperienced minerals – together with battery metals akin to lithium, nickel and cobalt. That is partly being driven by optimism over an finish to Fed price hikes and information signaling a possible uptick in near-term demand. China’s central financial institution this week vowed to make sure financing for the property sector, a serious client of the purple metallic.

A lot of the different pure-play copper shares received an even bigger quick bounce from this information, though SCCO is crushing its rivals by way of momentum prior to now 12 months, which was boosted by a stable Q3 earnings report, beating the EPS consensus goal by 5% and the income goal by 60%.

The issue with SCCO, regardless of the stellar momentum and profitability metrics, is that the inventory worth seems costly each relative to the sector, its friends and intrinsically.

SCCO Relative & Intrinsic Valuation

By almost each valuation a number of obtainable, SCCO seems considerably overvalued relative to the sector, though its dividend yield of 5.35% is solidly above its materials sector friends. SCCO is buying and selling at greater than 20x earnings, 7x e-book worth, and 15x money movement. Southern Copper’s EV/EBITDA TTM ratio, a crucial a number of for valuating mining firms, is greater than 32% larger than the sector median whereas EV/EBITDA FWD is over 50% larger.

SCCO’s dividend has robust grades throughout the board by way of security, progress, yield, and consistency. The dividend has grown at a CAGR of over 38% over the previous three years. The annual payout in 2023 was $4.00/share, however consensus estimates are projecting it to fall to $3.21/share subsequent 12 months earlier than bouncing again to $3.90/share.

A dividend of $3.21/share, at a perpetual progress price of 5%, and price of fairness of 9.5%, implies a inventory worth of $71.33, about 5% underneath the present worth. Nevertheless, based mostly on a perpetual progress price of 6%, the inventory could be price $91.71, implying its undervalue by over 20%.

When placing collectively the intrinsic valuation I relied on consensus estimates for the highest line for the primary three years of the DCF mannequin then based mostly years 4-10 on Southern Copper’s manufacturing projections utilizing a copper worth of $3.85/lb. Ultimately it translated into an annualized gross sales progress price of over 6 p.c. I used an EBIT margin of 45% and a tax price of 35%. The capex/gross sales ratio averaged out to 16% and levered free money movement a wholesome 23% over the ten years. Gross sales are projected to develop from $10.2mln in 12 months 1 to $18.2mln by 12 months 10, in response to the mannequin.

In accordance with the discounted money movement evaluation, utilizing 9.5% as the price of fairness, the inventory’s honest worth is projected to be $57.20, suggesting that the inventory is about 30% overvalued. I embody a sensitivity desk under that exhibits the inventory could be pretty valued if we assumed a copper worth of $4.50/lb for years 3-10.

Dangers

A pair dangers price mentioning should do with the corporate’s possession construction, float %, brief curiosity and to a lesser diploma, debt. Nearly 90% of excellent shares of Southern Copper are owned by Grupo México, S.A.B. de C.V. (OTCPK:GMBXF). And GMBXF is 60% owned by Empresarios Industriales de México and its CEO German Larrea Mota-Velasco. That is fairly a consolidation within the fingers of some. Extra stunning is the very fact the float is simply 11% of shares, considerably decrease than its high pure-play friends.

The brief curiosity of over 6% can be fairly excessive in comparison with most shares. In truth, solely about 25 different materials sector shares have larger brief pursuits.

SCCO’s debt to fairness ratio of 90% is a bit excessive in addition to its curiosity fee/gross sales ratio of over 3%, though the latter seems well-covered by working earnings. Southern Copper’s Altman-Z rating of almost 6 is encouraging together with the very fact it obtained BBB+ credit score rankings from S&P and Fitch.

Conclusion

No different pure play copper miner is better-positioned than Southern Copper to reap the benefits of the anticipated growth in demand for crucial minerals required for clear vitality applied sciences amid the worldwide race to net-zero emissions. The corporate has the world’s largest copper reserves, monster working margins of 45%, and plans to develop output 80% by 2032. To not point out it has a robust dividend at $4.00/share, which represents a yield of over 5%. Regardless of these strengths the inventory remains to be a bit costly for brand spanking new buyers. Nevertheless, the inventory is certainty price holding onto given the corporate’s strategic place, robust fundamentals, high-quality dividend, and stable momentum.