Southern Copper Digs Up Doubled Earnings

By Greg Sushinsky | August 08, 2011 AAA

Mining company Southern Copper (NYSE:SCCO) more than doubled its earnings from last year's second quarter, as it cashed in on increased sales as well as higher copper prices. The Phoenix-based company, which is a subsidiary of Mexican miner Grupo Mexico, is one of the largest copper producers in the world and carries a $28 billion market cap. The company faces political uncertainty with its Peru operations.

TUTORIAL: Stock Basics

Southern's Shining Quarter
Net income was $658 million or 77 cents a share, an increase from $313.4 million, or 37 cents, in last year's second quarter. Sales were $1.8 billion, up from $1.17 billion, a 54% increase from last year's same quarter. Copper future prices were on average 30% higher than in the year ago quarter. September delivery copper futures on Comex recently traded at $4.4795 a pound.

Labor, Environmental and Political Issues
Production was up in the quarter to 146,241 tons, a nearly 30% increase. This was driven by the Buenavista mine in Mexico, which returned to full capacity production after long years of labor disputes. The company faces political uncertainty with its Peru operations. The Tia Maria project in Peru, in which Southern Copper has already invested millions, is expected to cost a total of $1 billion, faces political and environmental opposition. Peru's newly elected president Ollanta Humala has vowed to impose a windfall tax on mining companies, but it's yet unclear at the present just what the new policy will be or how this will play out.

Miners Thriving
Mining is thriving as the metals industry continues to show strength. This of course hasn't been limited to one metal but has been widespread across the sector. Southern Copper has a huge profile in Mexico and Peru, and its copper mining is formidable. Vancouver-based Teck Resources (NYSE:TCK), which has far flung operations from Canada to Peru, mines coal and copper, and recently nearly doubled its profits in its latest quarter. Higher copper prices were a large factor. Other large miners, such as Vale SA (NYSE:VALE), Rio Tinto Plc (NYSE:RIO) and BHP Billiton Ltd. (NYSE:BHP), the world's big three in iron ore, are also booming.

The big three are deeply involved in the China trade and accounted for 62% of China's raw material. The big three in iron ore are involved in copper and other metal mining and production as well, and look to continue to ride China's import boom. While the metals tend to be cyclical, the metals trade is being driven by real demand and real utility, as the myriad of industrial uses for copper are the drivers.

The Bottom Line
Global demand for copper remains strong. The company would have had even better results had its hedging not dampened revenues. Only about a third of this year's output will be unhedged. The company hedged more than 30% of its 2011 output at $4.08 a pound, and another 30% with a maximum price of $4.84 and a floor of $3.02.

Hedging aside, Southern Copper looks as though it should continue having robust sales and profits in the near term. However, investors should pay attention to the political situation in Peru regarding mining. The company currently sells at about 17 times earnings, with a forward multiple of just over 8. It pays a dividend with an annualized yield of 6.68%, though the amounts can fluctuate, so investors should watch that. Its stock price has languished, yet with the raft of unsettling global economic news, this is a company that more investors should be interested in. (These decision-making tools play an integral role in corporate finance and economic forecasting. Refer to Using Decision Trees In Finance.)

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