Copper And Zinc Expansion Drive Growth As Projects Enhance Future Prospects

Key Takeaways

• Southern Copper's increased copper and zinc production in 2024 is expected to drive revenue growth and enhance long-term scalability.
  
• Strategic projects and by-product improvements aim to boost net margins through production efficiencies and favorable pricing.
  
• Unstable projects, regulatory risks, and increasing costs threaten Southern Copper's operations and profitability, while water scarcity and price fluctuations pose additional challenges.

Catalysts

Engages in mining, exploring, smelting, and refining copper and other minerals in Peru, Mexico, Argentina, Ecuador, and Chile.

• Southern Copper expects a 7% increase in copper production in 2024, driven by recovery at their SX-EW facilities at Buenavista, higher production in Peru, and operations at the new Buenavista Zinc concentrator. This is expected to positively impact revenue through increased sales volume.
  
• The Buenavista Zinc concentrator has ramped up faster than expected, leading to a projected 84% increase in zinc production for 2024 compared to 2023. This significant production boost is likely to enhance revenue from zinc sales.
  
• Southern Copper's strategic expansion projects, including Tia Maria, Los Chancas, and Michiquillay in Peru as well as El Pilar and El Arco projects in Mexico, are projected to boost long-term growth by increasing production capacity and potentially improving net margins through scale efficiencies.
  
• The expected improvement in by-product production, including a 13% increase in silver production and a 5% increase in molybdenum production in 2024, is likely to enhance earnings through increased sales of these higher-margin by-products.
  
• Southern Copper aims to maintain low operating cash costs around $0.76 per pound benefiting from efficiencies in zinc and silver production; this could improve net margins as by-product prices and production levels remain favorable.

Southern Copper Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Southern Copper's revenue will grow by 5.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 27.7% today to 26.4% in 3 years time.
• Analysts expect earnings to reach $3.4 billion (and earnings per share of $5.41) by about November 2027, up from $3.0 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $4.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.1x on those 2027 earnings, down from 26.4x today. This future PE is greater than the current PE for the US Metals and Mining industry at 18.8x.
• Analysts expect the number of shares outstanding to decline by 7.48% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.33%, as per the Simply Wall St company report.

Southern Copper Future Earnings Per Share Growth

Risks

• Southern Copper faces potential instability and protests in relation to its Tia Maria project in Peru, which could delay project timelines and impact future revenues.
  
• Regulatory changes and illegal mining activities in both Mexico and Peru present operational risks that could affect production levels and result in higher operational costs or delayed projects.
  
• The company is confronting increasing operating costs, such as in repair materials and inventory consumption, which may lead to lower net margins if not managed efficiently.
  
• Fluctuations in the prices of by-products like molybdenum and silver may negatively affect earnings, as these products contribute to the company's overall profitability.
  
• Water scarcity issues, particularly in Mexico, pose long-term operational risks that can increase operating costs or disrupt production, which may consequently affect revenue and profit margins.

Valuation

• The analysts have a consensus price target of $100.98 for Southern Copper based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $154.14, and the most bearish reporting a price target of just $51.68.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $12.8 billion, earnings will come to $3.4 billion, and it would be trading on a PE ratio of 23.1x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of $100.99, the analyst's price target of $100.98 is 0.0% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.