Southern Copper - Best in class with a good valuation

Looks like copper markets have increased dramatically since my last post. We still want to be diligent with our research and keep digging into this market. The valuations are still attractive and so is the macroeconomic outlook.

Did some reading about Southern Copper today and discovered they are a very well ran company with a very strong competitive position, world-class assets, and great growth options. They have one of the lowest cash cost for copper in the world and is ranked number one in the world for mine life and copper reserves. They are the fifth largest producer of copper, highly geographically diversified, and have a large pipeline of greenfield projects. They also have a proven management team that is laser-focused on cost efficiency and growth.

The market capitalization is currently $48B and they should be able to make $2.5B in Net Free Cash Flow per year. So you are looking at the company selling for 19x cash production. Not fantastic compared to the values we were seeing a couple of months ago, but with long-term government bond rates below 4%, this is an attractive rate of return. Plus, we could see a boost in the copper price if demand starts to pick up.

We do believe demand will pick up and we have discussed the fundamental outlook for the commodity extensively in this blog. I also just finished reading a great piece of research by my friend Steve on the Auto sector depreciation cycle, which has good prospects. So not only do EVs need twice as much copper, the auto industry is in a position where demand should be above average over the next decade. Looks like good tailwinds for a market that has decent valuations. This further strengthens my conviction that copper and base metals could be a good place to find decent returns.