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WIKI ANALYSIS
Having operations in Peru, Mexico, and Chile, Southern Copper Corporation (PCU) is a vertically integrated producer of copper. The company is a majority-owned, indirect subsidiary of Grupo Mexico S.A.B. de C.V. ("Grupo Mexico"). Through its wholly owned subsidiaries, Grupo Mexico currently owns approximately 75.1% of PCU's capital stock. The company has mining, smelting and refining facilities situated in the southern part of Peru. It also operates a smelter and a refinery west of the mines in the coastal city of Ilo. The company caters to a broad clientele in the U.S., Japan, Switzerland, Italy, the United Kingdom and other parts of the world. Southern Copper's principal business is copper production. Copper operations involve mining, milling and floatation of copper ore to produce copper concentrates, which are processed to make blister copper. The company produces copper cathodes by refining blister copper and using solvent extraction/electro mining technology. Additionally, PCU produces silver and molybdenum. The company recovers silver in the refining process or as an element of blister copper. PCU extracts molybdenum from copper concentrates as a byproduct. Building, construction and electronics industries generally use company's products. The company manages its business under three segments:
Peruvian operations consisting of Toquepala and Cuajone mines. Mexican open pit copper mines including La Caridad and Cananea mines.
Mexican underground mining operations including five underground mines producing zinc, copper, silver and gold. It also has a coal and coke mine and various zinc and copper processing facilities. This group is referred to as the IMMSA unit.
Management plans to grow the business by focusing on its copper competencies. The company is working to optimize productivity at its existing facilities and exercise stringent cost-control measures. It is also expanding capacity at its facilities.
Southern Copper continues to be a leveraged player on a global economic recovery. China has been a large buyer in the copper market, spurred by the growth in its industrial production. The global economic backdrop remains supportive of strong copper demand well into next year. Besides favorable growth prospects in China, the U.S. manufacturing sector also appears well positioned to grow and will result in demand for larger quantities of copper. Meanwhile, strong industrial activity and growing demand for copper from the manufacturing sector will result in tight copper supplies and will support higher prices. In addition, we anticipate further price support from strong global demand. Each $0.15 increase in the copper price adds about $1.15 to PCU's earnings per share. Further, the company has undertaken various exploration activities to locate additional ore bodies in Peru, Mexico and Chile. The construction at the Tia Maria project will commence in 2007, and the company plans to commence operations on the project by the fourth quarter of 2010 after which it is expected to produce 120,000 metric tons of copper cathodes per annum. Moreover, PCU is in the process of conducting a feasibility study at its Los Chancas project where testing to date indicates a mineral deposit of 200 million tons. Additional copper production from both the above projects is likely to be about 100 to 210 thousand tons yearly, starting 2009 and 2016, respectively. Further, the company is planning to increase annual production capacity of the Cananea mines to 33,000 metric tons of copper by expanding the concentrator and building a new SX/EW plant with capacities of 35,000 tons per year. Expansions at Cuajone mine will increase annual copper production by 50,000 metric tons and molybdenum production by 700 metric tons by 2012. All these expansions are likely to increase the total copper production capacity to 270,000 tons per year for 2012. This is an increase of 39% from the current production level.
The company is focusing on lowering costs. Management had previously mentioned the possibility of a partial integration of PCU with another mining company. This could result in both geographical and product diversification, which would reduce associated risks. To be more cost effective, Southern Copper has plans to set up a 450-megawatt power generation plant by 2008 in Mexico, which will help control the cost of energy, a major component of its operating costs. The company is also benefiting from the completion of the leaching project at its Toquepala mine, resulting in $25 million of annual operating cost savings.
Company Overview
The company has vertically integrated their operations and maintain a good bottom line. The company has also provided their shareholders with healthy dividend yields. Just for carrying their stock, they have rewarded their shareholders $6.50/share over the past 4 quarters which equates to roughly a 6% yield.
Sales by Geographical Area
Southern Copper’s sales breakdown by segment from 2006 shows the majority of the sales (30%) going to the United States, whose economy is currently softening. This would explain some of the recent weakness in the company’s stock and its fourth quarter drop in net income compared to the same period a year ago. Asia represents a smaller 6% of Southern Copper’s total sales. In order to keep revenues afloat, the company is trying to shift a sizeable chunk of its North American sales (12%) to Asia (See: Emerging Markets). World usage of refined copper was primarily driven by China’s massive consumption as it grew by 37% in the same period. Net Imports by China of refined copper increased by 170%[2].
Trends and Forces
Competition
If we compare Southern Copper to its bigger brother, the juggernaut mining company Freeport-McMoRan Copper & Gold (FCX) in relation to some basic measures, we see that the former has a good valuation and has a higher profit margin as well. PCU has maintained significant presence in the market.
Global Demand for Copper
Global demand for copper (See: Copper Prices has increased 7.2% in the first 10 months of 2007 from the same period in 2006 [4]. This growth in demand for copper has caused copper prices to grow skyward. Southern Copper’s future results ride on how high copper prices will go. Prices rise, revenues rise, and then profits rise. World demand is exceeding at a faster rate than production.
Mapping the relationship of PCU share price versus the Copper price, we see that the market expectations seem to have gone ahead of itself, and that might put pressure on the company in the future. Moving on, an analysis of Southern Copper’s revenue growth in relation to copper prices, shows us Southern Copper’s ability to grow revenues in line with rising copper prices. Accomplishing this would mean the company leveraged existing mines through more efficiency, or demonstrated the speed at which new mines were launched and utilized, or a combination of both. This would give me the confidence in Southern Copper’s ability to increase mining capacity quickly to satisfy rising demand.
Management-Worker Issues in Mexico hampering growth
Production was lower due to the Cananea strike in Mexico (still rumbling on) in early 2008 but price rises in copper pushed up profits. The Cananea situation is a good example of the in management quality in Mexico. Mexican management is stuck in the 1970s, when techniques to improve productivity were zero carrots and hundreds of sticks. The latest move is to threaten to close the mine completely if the workers don't go back, one of the better examples of cutting your nose to spite your face so far this year. Despite this, PCU and its parent company Grupo Mexico [GMEXICOB.MX] have a very generous dividend policy. In the chart period (2003 to date), PCU has paid out U$19.64 in dividends.
So while Copper (and other metals prices) remain high, so will the dividends. And so will the stock price. And this is demonstrated by the U$1.70 dividend that PCU will pay in June 2008, all through a period of industrial unrest. There's plenty of upside available once the smanagement debacle at Cananea ends.
Notes
- ↑ What can I do with 10 Grand? Blog post on PCU
- ↑ What can I do with 10 Grand? Blog post on PCU
- ↑ What can I do with 10 Grand? Blog post on PCU
- ↑ What can I do with 10 Grand? Blog post on PCU
- ↑ What can I do with 10 Grand? Blog post on PCU
- ↑ What can I do with 10 Grand? Blog post on PCU
- ↑ What can I do with 10 Grand? Blog post on PCU
- ↑ What can I do with 10 Grand? Blog post on PCU
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