Southern Copper’s balance sheet metrics
Balance sheet strength is a key metric that investors in metals and mining companies (XME) should track. Companies in the mining space have to incur huge capital expenditures to invest in new plants and mines. Companies often borrow to meet their capex (capital expenditure) needs.
However, they also have to strike the right balance in their capital structure. Higher leverage can be a concern, especially under challenging times like we’re witnessing currently.
Southern Copper’s leverage ratios
- Southern Copper (SCCO) had a net debt to EBITDA (earnings before interest, taxes, depreciation, and amortization) of 1.31 as of the end of fiscal 2014. But although Southern Copper’s net debt to EBITDA has risen over the last couple of years, as you can see in the graph above, it’s still less than several other copper producers.
- Freeport-McMoRan (FCX) and Teck Resources (TCK) had net debt to EBITDA of 4.67 and 2.68, respectively, as of the end of fiscal 2014. These companies’ higher leverage ratios are one reason their stock prices have fallen steeply this year.
- Southern Copper’s interest coverage ratio was 19.32 as of the end of fiscal 2014. You can define interest expense as EBITDA divided by interest expense. It measures a company’s ability to make regular interest payments. Southern Copper’s interest coverage ratio is much higher compared to several other mining companies.
Southern Copper’s leverage ratios are much more comfortable than other copper producers. Some of its peers, including Freeport-McMoRan and Teck Resources, are grappling with huge debt piles. Freeport-McMoRan’s debt levels surged in 2012 when it made a foray into the energy business.
Currently, Freeport forms 0.82% of the iShares North American Natural Resources ETF (IGE).
So far, Southern Copper hasn’t ventured into unrelated businesses. We’ll discuss more about Southern Copper’s business strategy in the next part of this series.