Southern Copper Corp. (SCCO, Financial) posted second-quarter results after the market closed on Tuesday. The Phoenix-based copper producer recorded a 1.8% year-over-year decrease in net income to $402.4 million and lower net sales of $1.82 billion.
As a result of lower prices for copper and silver, the top line declined 1% year over year even though the miner reported increases in the volume of copper and molybdenum sold. For the same reason, the net income margin dropped 20 basis points to 22.1%, adjusted earnings before interest, taxes, depreciation and amortization fell 1.3% to $942.8 million and the adjusted Ebitda margin declined 10 basis points to 51.9%.
Higher copper sales volumes resulted from improved production at the Toquepala mine in Peru and at the Buenavista mine in Mexico. Lower copper ore grades and recovery rates resulted in a production decline at the Cuajone mine in Peru.
The company produced 256,352 tons of copper, up 16.5% from the prior-year quarter. Thanks to increased copper throughput, fixed costs were spread over a larger base, determining a significant improvement (up 11% from the previous quarter) in the operating cash cost of 81 cents per pound.
In regard to byproduct production, molybdenum went up 24.7% and mined silver jumped 5.3% thanks to increased throughput at the Toquepala mine. In contrast, mined zinc decreased 1.3% on the back of underperforming operations at the Charcas mine in Bolivia and the Santa Eulalia mine in Mexico.
The miner also announced that funds allocated to assets based on upgrade purposes were $353.5 million in the first six months of 2019. Southern Copper hopes to hit 1.5 million tons of annual copper production before 2026.
Good news from the expansion copper project the company is running at its Tia Maria mine in Peru has encouraged the miner to proceed with its $6.7 billion greenfield investment program.
Additionally, on Aug. 22, the mining company will pay a quarterly dividend of 40 cents per common share to shareholders of record as of Aug. 8. The ex-dividend date is Aug. 7.
Based on the closing share price of $37.4 on Tuesday, the quarterly dividend generates a forward dividend yield of 4.25% versus the industry median of 2.31% and the S&P 500 Index’s yield of 1.87%. The payment will be the third one this year.
Will Southern Copper guarantee a dividend payment in the coming quarters?
It really depends on copper prices as the red metal determines over 85% of total revenues. The 11.2% year-over-year drop in copper prices per pound traded on the London Stock Exchange pushed quarterly revenues, adjusted Ebitda and net income down 1% to 2%.
Since the red metal is forecasted to downtrend further over the next four quarters to close at an estimated $2.5334 per pound in the final quarter of 2020, which is down 8.7% from the second-quarter average price of $2.776, the board’s next decision could be to cut the dividend.
If this happens, it will negatively impact the stock as it will be the first reduction in the quarterly dividend following the impressive hike from 3 cents paid on March 1, 2016 to 40 cents paid on Aug. 21, 2018.
Some operating issues at the marine terminal located next to Guaymas city in the Mexican state of Sonora may also impinge on Southern Copper's financials if the company does not get the environmental permits related to storage and transportation of sulfuric acid. These activities are still closed after the sulfuric acid spill on July 9.
Thus, even though the stock, as illustrated by the GuruFocus chart, appears cheap, I wouldn’t acquire additional shares of Southern Copper. Instead, I would stick to Wall Street’s sell-side analysts' recommendation to hold the position in the stock, waiting for a rise in the prices of copper futures. Also, the average target price of $39.23 per share projects less than 5% upside from Tuesday’s closing price.
After a 21% decline over the past year, the stock closed at $37.4 on July 23 for a market capitalization of $28.91 billion. The share price is still slightly above the 200- and 50-day simple moving average lines, and in line with the 100-day line.
The closing price on Tuesday was 28.9% off the 52-week low of $29.01 and 32.5% from the 52-week high of $49.56.
The 14-day relative strength index is 50, indicating the stock is neither overbought nor oversold.
Disclosure: I have no positions in any securities mentioned.
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