Is This Copper Mining Stock a Buy for Its Fat Dividend?

Typically, mining companies pay hefty dividends, despite their cyclical business and high capex. For instance, Rio Tinto’s RIO dividend yield is over 6.5%, while BHP’s BHP is over 5%. When it comes to capital appreciation, though, both of these stocks have been laggards, and the total returns (after accounting for dividends) doesn't leave much to brag about. Metals, especially iron ore, trade well below all-time highs, which has dampened the price action of both these companies. 

In the mining space, though, copper (HGU24) is one metal that stands out. The red metal hit its all-time high in May, despite growing noise over China’s slowdown, higher interest rates, and geopolitical tensions. Some analysts see copper as the “new oil,” and it's no wonder that mining giants have been looking to grab copper assets, as new discoveries have been scarce.

Among major copper miners, Freeport-McMoRan FCX is the largest publicly traded pure-play copper miner, while Southern Copper SCCO boasts the highest copper reserves globally. SCCO has also been paying fat dividends - unlike FCX, which has been relatively frugal with its payouts. 

Is SCCO stock a buy for its dividend? We’ll discuss this in this article.

Copper Markets Are Expected to Be in a Deficit in 2024

The consensus view calls for a slight deficit in copper markets this year, which would mean demand in excess of supply, in commodity parlance. Notably, copper was previously expected to be in a supply surplus in 2024. However, a combination of better-than-expected demand, coupled with weaker-than-expected production, could push the markets into a deficit.

Copper mining is concentrated in Latin America, and faces chronic supply disruptions from issues like labor actions, government regulations, protests from local communities, and adverse weather conditions.

As for demand, like almost all other metals, China accounts for over half of global copper demand. As a result, the slowdown in China’s real estate sector – which is the single biggest consumer of metals – coupled with a structural slowdown in the Chinese economy, continues to be a major headwind for copper.

Copper’s Long-Term Outlook is Positive

At the same time, copper is among those industrial metals that do not face a structural overcapacity. Copper is a play on multiple themes, like renewable energy, electric cars, and more recently, artificial intelligence (AI). As data centers fuel copper demand – directly, through components like cables and connectors, and indirectly, through higher electricity usage - analysts are getting increasingly constructive on copper.

Nearly all analysts agree that copper will be in a major supply deficit by the end of this decade, even as the size of that deficit remains up for debate.

Is Southern Copper a Buy?

Amid the recent correction in copper, Southern Copper stock has also come off its highs. However, despite having fallen about 15% from its 52-week highs, and holding a strong portfolio of copper mines, I don’t find SCCO stock to be a dividend stock worth buying at these prices.

Southern Copper’s production is expected to be stagnant between 2024 and 2026, and is expected to rise only in 2027, when its Tia Maria mine starts production. The mine’s development has been held back due to community protests, but things could finally be turning around. Citing an internal company document, Reuters reported over the weekend that the company is set to resume development at the mine.

SCCO trades at a next 12-month (NTM) enterprise value-to-earnings before interest, tax, depreciation, and amortization (EV-to-EBITDA) multiple of 14.2x, which is quite high by historical standards, as well as relative to other mining stocks. That leaves little room for upside.

Analysts Are Also Bearish on SCCO Stock

Wall Street analysts also seem quite bearish on SCCO stock, and it has a consensus rating of “Moderate Sell.” Of the 7 analysts covering the stock, only 1 has rated it as a “Strong Buy,” while the remaining 6 rate it as a “Strong Sell” or “Moderate Sell.” SCCO’s mean target price of $86.92 is about 20.9% lower than current price levels.

Southern Copper’s Dividend Has Been Quite Volatile 

Southern Copper has a variable dividend policy. The board decides on its quarterly dividend based on multiple variables, like its current and expected cash flows, capex needs, as well as other financial needs. In February, the company cut its quarterly payout to 80 cents, and in April, it swapped the cash dividend with the stock dividend.

In other words, instead of giving cash to shareholders, it gave them additional shares from its treasury holdings. Based on the then-prevailing stock price, that stock dividend came out to around $1.20 per share, for an annualized yield of nearly 4.5% based on current prices. 

Southern Copper did not commit to whether stock dividends would be the norm in the future. After paying 8 million treasury shares as dividends, the company still has 103 million more shares, which it could potentially use for future dividends if the board so decides.

All of that said, despite copper’s positive fundamentals, I would not yet jump to buy Southern Copper stock, and would wait for better prices. The stock's risk-reward does not look too favorable at these levels, while the dividend is a bit too volatile and uncertain to fall for.

On the date of publication, Mohit Oberoi did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.