Southern Copper Stock: Bullish 4.9% Yielder Hikes Payout 33%
September 12, 2023
Why SCCO Stock Is Up in 2023 & Could Keep Rising
It may seem a little too academic, but as you’ll read, there are many reasons why the outlook for Southern Copper Corp (NYSE:SCCO) is bullish for the coming decades.
A little background first. Because copper has so many applications, it’s generally seen as a cyclical economic indicator. The metal is used in homes, factories, electronics, and power generation, including in the green transition.
So, when the demand for copper rises, it typically means the economy is growing. When the demand falls, it typically means the reverse. During the 2008 Great Recession, copper prices tumbled from about $3.75 to $1.50 per pound. (Source: “Copper Prices – 45 Year Historical Chart,” Macrotrends, last accessed September 7, 2023.)
During the COVID-19 pandemic, copper prices went on a tear from $2.17 per pound in March 2020 to more than $5.00 per pound in March 2022. Why did copper prices rip higher during the worst economic crisis of the last 100 years? Record fiscal stimulus led to a surge in manufacturing and a weak U.S. dollar, which have an inverse relationship.
Since then, Copper prices have been sliding, with rising interest rates and ongoing fears of a global recession hampering demand for the metal. As of September 7, the price of copper was down by more than 32% from its March 2022 peak of $5.03 per pound. The drop can be attributed to weak demand from China and a strong U.S. dollar.
While cyclical headwinds have been limiting copper prices in 2023, the long-range forecast looks different.
The demand for copper is projected to soar over the next number of years. The demand for copper is being fueled by the growth of clean energy projects and a supply shortage. (Source: “Distribution of Refined Copper Consumption Worldwide in 2022, by Region,” Statista, last accessed September 7, 2023.)
Max Layton, Citigroup Inc‘s (NYSE:C) managing director for commodities research, recently said that copper’s eventual bull run could make crude oil’s “famous 2008 rally look like child’s play.” (Source: “Oil’s Historic Price Surge in 2008 Will Look Like ‘Child’s Play’ Compared With the Expected Copper Boom by 2025, Citi Says,” Fortune, August 28, 2023.)
About Southern Copper Corp
Southern Copper is one of the largest integrated copper producers in the world. Its business segments include Peruvian operations, Mexican open-pit copper mines, and Mexican underground mines. The company also conducts exploration activities in Argentina, Chile, Ecuador, Mexico, and Peru. (Source: “Results: Second Quarter and Six Months 2023,” Southern Copper Corp, July 27, 2023.)
The company has the copper industry’s largest reserves and resources: about 44.8 million metric tons (mmt) of reserves and 71.9 mmt of resources. Its copper reserves are 23% higher than those of Freeport-McMoRan Inc (NYSE:FCX), 58% higher than those of BHP Group Ltd (NYSE:BHP), and 142% higher than those of Rio Tinto plc (NYSE:RIO). (Source: “Company Presentation: August 2023,” Southern Copper Corp, last accessed September 7, 2023.)
In addition to being the No. 1 company in the world by copper reserves and resources, Southern Copper is the No. 5 copper producer, No. 7 copper refiner, and No. 10 copper smelter. The company also ranks as one of the world’s largest producers of molybdenum, silver, and zinc.
At its current volumes and production levels, the company has a mine life of 68 years. By 2032, it expects its copper production to close in on 1.6 mmt. That’s 70% more than the 939,400 tons of copper production it projects for 2023.
Some of those gains can be attributed to Southern Copper Corp’s ongoing expansion efforts. The company has been operating the Pilares mine in Mexico since the fourth quarter of 2022. It has subsequently increased its annual copper production capacity by 35,000 tons.
The company’s new zinc concentrator in Buenavista, Mexico has received material to process and has been ramping up its operations. This project is expected to increase the company’s annual production by 100,000 tons of zinc (doubling its current zinc capacity) and 20,000 tons of copper.
Southern Copper Corp’s El Pilar project (also in Mexico), which is under development, has about 36,000 tons of copper.
The vast majority of the company’s revenues (76%) come from copper, followed by molybdenum (13%), zinc (three percent), sulfuric acid (three percent), silver (three percent), and “other” (two percent). By market, Mexico accounts for most of the company’s revenues (35%), followed by Asia (31%), the U.S. (12%), “Other America” (nine percent), Europe (eight percent), and Peru (five percent).
Southern Copper Corp’s cash cost to produce one pound of copper was $0.67 in 2021 and $0.78 in 2022. The price of a pound of copper was $4.24 in 2021 and $4.00 in 2022. It’s expected to remain at $4.00 per pound in 2023.
Net Income Jumped 26% in Second Quarter
For the second quarter, Southern Copper announced that its revenues slipped by 0.02% year-over-year to $2.3 billion, despite a 12.1% increase in its copper sales volume. The slight decrease in the company’s revenues was a result of lower copper and zinc prices, as well as lower silver sales volume. (Source: Southern Copper Corp, July 27, 2023, op. cit.)
Southern Copper’s second-quarter net income was up by 26.6% year-over-year, at $547.5 million, or $0.71 per share. The big increase in net income was mainly a result of a 7.9% reduction in the company’s cost of sales.
The company’s adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) were up by 9.2% year-over-year, at $1.2 billion.
During the second quarter, Southern Copper Corp’s copper production increased by 9.2% year-over-year to 227,533 tons. Its mined zinc production increased by 13.8%, its mined silver production rose by 8.0% year-over-year, and its molybdenum production inched up by 0.2% year-over-year.
The company’s operating cash cost per pound of copper in the second quarter was $1.12, which represents an increase of four percent compared to the same period last year. The increased cash cost was mainly due to higher production costs and lower by-product credits for zinc and sulfuric acid.
During the second quarter, the company spent $252.5 million on capital investments, which was a 12.4% increase over what it spent in the same period last year. Those capital investments accounted for 14.3% of its net income.
Commenting on the results, German Larrea, Southern Copper Corp’s chairman of the board, said, “Our fortitude is evident when comparing results in quarter-on-quarter terms and on a year-to-date basis. Most notably, production and sales volumes over those periods rose for copper and zinc despite lower market prices.” (Source: Southern Copper Corp, July 27, 2023, op. cit.)
Management Declared Q2 Dividend of $0.50/Share
Southern Copper Corp is known for its outstanding dividend history.
In March 2020, in the early days of the COVID-19 pandemic, Southern Copper stock’s quarterly dividend stood at $0.40 per share. From the fourth quarter of 2020 through the fourth quarter of 2021, the company raised its payout every quarter—from $0.50 to $1.00 per share. In the second quarter of 2022, it raised its dividend again to $1.25 per share. (Source: “SCCO Dividend History,” Nasdaq, last accessed September 7, 2023.)
When it comes to the dividends of commodities-related companies, the payouts don’t always go up.
In August of this year, SCCO stock paid a quarterly dividend of $1.00 per share, for a yield of about 4.9%. That payout was down from $1.25 per share in the second quarter of 2022 but up from $0.75 per share in the third quarter of 2022. (Source: “Southern Copper Corporation Dividend Announcement,” Southern Copper Corp, July 20, 2023.)
Southern Copper Stock Up 80% Year-Over-Year
In terms of share price, SCCO stock has been performing exceptionally well. As of this writing, it’s up by:
- 11% over the last three months
- 35% year-to-date
- 80% year-over-year
Those are big gains by any account. Can Southern Copper stock maintain that torrid pace, though?
Chances are good that SCCO stock will give up some short-term ground to profit-taking. That’s would be well deserved; Southern Copper stock hit a new record high of $86.55 on July 31. It has mostly held on to those gains since then.
Chart courtesy of StockCharts.com
The Lowdown on Southern Copper Corp
Copper prices may be a little depressed right now, but their bullish outlook means investors should keep Southern Copper Corp on their radar. The company has world-class assets in investment-grade countries, the highest copper reserves of any publicly listed company, and excellent organic growth projects.
The company also has an outstanding dividend history. With a bullish long-term outlook for copper—and low-cost, integrated operations—the outlook for Southern Copper’s business, stock price, and dividends is terrific.
