Capital Investments In Mexico And Peru Will Expand Production Capacity

Key Takeaways

• Substantial capital investments and efficient operations are expected to drive significant production growth, enhancing revenue and net margins.
  
• Tight market conditions and low inventory levels may boost copper prices, positively impacting Southern Copper's revenue and profitability.
  
• Southern Copper is vulnerable to U.S.-China tensions, rising costs, and operational disruptions, risking revenue and margins despite planned significant capital expenditure.

Catalysts

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

• Southern Copper has announced substantial capital investments totaling over $15 billion, including projects in Mexico and Peru, which are expected to drive future production growth and potentially boost revenue significantly.
  
• The company's Buenavista zinc concentrator is now operating at full capacity, anticipated to drive a 31% increase in zinc production in 2025, likely enhancing revenues and improving net margins due to efficient operations.
  
• Expansion projects such as Tia Maria, Los Chancas, and Michiquillay are progressing, with expectations for additional production capacity, which could positively impact revenue and earnings starting in 2027 through 2030.
  
• Operational efficiencies and a strong focus on cost control have led to a reduction in cash costs, with expectations to sustain low costs between $0.75 to $0.80 per pound of copper in 2025, potentially boosting net margins and earnings.
  
• Tight copper market conditions, with expectations of supply-demand deficits and low inventory levels, could maintain or increase copper prices, positively impacting Southern Copper's revenue and profitability.

Southern Copper Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Southern Copper's revenue will grow by 1.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 30.0% today to 30.9% in 3 years time.
• Analysts expect earnings to reach $3.8 billion (and earnings per share of $4.64) by about May 2028, up from $3.6 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $4.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.6x on those 2028 earnings, up from 20.3x today. This future PE is greater than the current PE for the US Metals and Mining industry at 21.6x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.01%, as per the Simply Wall St company report.

Southern Copper Future Earnings Per Share Growth

Risks

• Southern Copper faces the risk of an intense commercial war between the U.S. and China, which could adversely affect global economic growth and subsequently reduce copper demand. This could potentially impact revenue and earnings.
  
• The significant arbitrage difference between COMEX and LME prices, largely driven by the potential for a 25% tariff on U.S. imports, presents uncertainty. If such tariffs are implemented, they could affect Southern Copper’s ability to sell profitably in the U.S. market, impacting revenue and profit margins.
  
• An increase in operating costs and expenses, which rose by 12% due to factors like inventory consumption and material costs, may hurt net margins despite sales growth.
  
• The company's significant capital expenditure plans over the next decade, exceeding $15 billion, could pressure cash flow and require careful financial management to maintain profitability.
  
• Community issues and disruptions, such as the incidents with illegal miners at the Los Chancas project, pose operational risks and could delay project timelines, adversely affecting future production and revenue projections.

Valuation

• The analysts have a consensus price target of $92.284 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 $128.73, and the most bearish reporting a price target of just $67.31.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $12.5 billion, earnings will come to $3.8 billion, and it would be trading on a PE ratio of 23.6x, assuming you use a discount rate of 7.0%.
• Given the current share price of $90.52, the analyst price target of $92.28 is 1.9% higher. 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.