Southern Copper: Stacked with Reserve Resources

By Alvin Gonzales - June 20, 2012 | Tickers: BHP, BBL, SCCO | 0 Comments

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Metal mining stocks may not be in an exciting industry, but they perform a task that is necessary to modern civilization. Furthermore, mining companies that are able to discover huge deposits of metals become very wealthy. For example, in the last twelve months, Southern Copper (NYSE: SCCO) had a net profit margin of 35.39%. This is larger than the net profit margin of one of the most profitable companies in the world, Apple, which had 27.13%. Thus, mining stocks make very good investments.

Two mining stocks that currently stand above their peers (in terms of return on assets) are Southern Copper and BHP Billiton PLC (NYSE: BBL) or BHP Billiton LTD (NYSE: BHP) (note: BHP Billiton is dual listed company). Southern Copper is an integrated mining company that focuses on mining copper, molybdenum, and silver in Peru and Mexico. BHP Billiton is a large diversified company that produces many natural resources including aluminum, coal, iron ore, base metals, oil, and natural gas.  In the last twelve months, Southern Copper and BHP Billiton generated return on assets of 20.97% and 29.91% respectively. The high returns point to good management and excellent assets.

However, the key to evaluating a mining company lies in the company’s reserves. Mining companies cannot be readily valued by standard valuation methods such as P/E ratio because their business relies on a finite resource. Once the mines are empty, the revenue stream is gone. To simplify the problem, investors can look for mining companies that have an extremely long reserve life based on its current production and proven reserves. If the company’s reserve life is long enough, regular evaluation methods can be used to estimate the company's worth.

The following tables estimate Southern Copper’s and BHP Billiton’s resource reserve life using proven reserves and production numbers from the companies’ 2011 annual reports.

The numbers are very rough estimates, but they provide a peek into the two companies’ longevity. Anyway, while BHP Billiton has respectable reserve lives for many of its resources, Southern Copper has a ridiculously long reserve life of 76 years for copper and 100 years for molybdenum. Furthermore, Southern Copper also has 4,400 million tons of additional probable reserves. Therefore, Southern Copper is a mining company that can be valued using regular valuation methods.

Looking at its balance sheet, Southern Copper has a tangible book value per share of $5.13. Using discounted cash flow analysis and assuming perpetuity, the company has an intrinsic value of $32.61 per share. Furthermore, as the global supply of copper and other minerals are depleted, their prices will naturally increase. Thus, Southern Copper and other mining companies with long reserve lives should experience growth in revenue and income. Furthermore, the stock, at its most recent quote, has a 6.59% dividend yield. In conclusion, Southern Copper is worth owning at its most recent price of $30.75.

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