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Southern Copper's (SCCO) premium valuation 'unwarranted' - Deutsche Bank

November 23, 2022 11:57 AM EST
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Southern Copper Corp. (NYSE: SCCO) was downgraded to Sell from Hold, with a price target of $45 per share by Deutsche Bank analyst Abhi Agarwal on Wednesday.

The analyst argued that the stock has ordinary growth and returns, but its valuation is extraordinary.

"Southern Copper (SCCO) shares have outperformed over the last one month (up 23% vs peers up 14%) driven by a rally in copper prices and the relatively in-line Q3/22. However, the updated guidance for 2023 onwards reflects that the company is struggling to get its operations on track after the COVID-related disruptions, as copper and zinc production was downgraded by 50Kt and 30Kt, respectively, while cash cost guidance was increased by ~10%. We believe these issues are not "one-off" and expect a step-up in sustaining capex and opex to get the operations on track again. SCCO is trading at a premium to peers on spot (2023e EV/EBITDA of 11x vs peers at ~8x), which looks unjustified to us given issues around its growth projects," Agarwal explained.

He added that a key reason behind the company's valuation premium compared to peers was its growth optionality;

"We estimate the NAV of SCCO's projects to be ~US$4.3bn, 12% of its market capitalisation. Yet, apart from El Pilar (under construction), we believe the rest of the projects are unlikely to progress soon, with community and environmental issues driving permitting delays. We forecast plateauing production (production CAGR of 2.5% for 2021-25 vs a 4% CAGR in 2015-21). Additionally, operational underperformance and inflation have pushed projects to the 2nd / 3rd quartile, which seem unlikely to change soon," Agarwal continued.

As a result, with the "growth projects facing consistent delays, cost positioning deteriorating, and sub-par cash returns," Deutsche Bank believes the premium is unwarranted.

By Sam Boughedda



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