Southern Copper (SCCO, Outperform)’s copper production increased by 4.9 percent year over year at its mines in Latin America in second quarter, however overall net income dropped by 9.5 percent as a result of reduction in copper prices ($3.08 per pound from $3.25 earlier) and growth in production costs.
EBITDA remained $708 million which is nearly 48 percent margin on $1.49 billion in net sales. Cash costs subsequent to by-product credits averaged $0.92 per pound which is below the industry standard. We still believe that company’s manufacturing capacity of 1.175 million tons target by 2017 which is two times of 617,000 tons manufactured in FY13, is achievable irrespective of it being breakneck growth in the industry.
Company should develop positive streak of more than 11% production growth in second half too. We also noticed that third solvent extraction electro winning (SXEW) plant, which is at Buenavista mine in Mexico has started functioning the 2Q itself. Company anticipates better results in second half as plant is ready to touch full capacity (which is 120,000 tons annually) in the third quarter. Buenavista’s new concentrator stays on schedule to begin in first six months of 2015, bearing a 188,000-ton capacity. Southern Copper also looks forward to Peru to pass its environmental impact study for its stalled $1.4 billion Tia Maria project in Peru in the course of third quarter. Tia Maria is expected to produce 120K metric tons/year of copper versus total company output of 670K last year.
We are hopeful that copper prices will go up from current $3 per pound in 2015 while Chinese demand rise decrease. While company has great advantage of low cost for mines at Mexico and Peru, it will add fair advantage of free cash flow over any copper price trend. Considering Southern Copper’s huge, long-lasting reserve base of 166 billion pounds; we upgrade rating to ‘Outperform’ from ‘Market Perform’ with price target of $40 from previous $30. At $32.69, stock seems bit overvalued to us, which is otherwise 19 times of our 2014 EPS estimate and 16 times of 2015 EPS estimate.