August 16, 2013 (www.investorideas.com newswire) Revenues at Cerro Verde fell USD390m in 2Q13 (-19.2% YoY) due to lower copper prices and a decrease in the production of concentrates. Production costs continued to rise (+15% YoY) while the company's net income was situated at USD106.3m (-39.2% YoY). Between 4% and 8% below our estimates.
Concentrates recovered in 2Q13; nevertheless if the company is to reach the total produced in 2012, it must hit the optimistic estimate of 57,000 MT for 3Q13 and 4Q13 (+23% QoQ, +25% semester on semester). The volume of cathodes produced posted a surprisingly significant increase and appears to indicate that our revised estimate of an annual volume of 30,000 (50,000 MT/year in 2012) until supplies run out in 2022 may actually be conservative. As such, we are updating our copper production estimate to 263,000 MT in 2013. This falls slightly below the production guideline for 2012, which remains in effect for 2013.
We estimate that Cerro Verde reduced its cash cost for copper QoQ (-11%), including molybdenum credits, to USD2,222/MT. Although this represented an improvement with regard to 1Q13's result (US$ 2541 MT), an analysis of 1Q12-2Q13 indicates a continuous upward trend in costs. The QoQ improvement is due primarily to sales of lower-cost inventory given that the majority of expenses relative to this stock increased 5%. In some cases the increases were much higher, including +20% for utilities and payments to Freeport for management services. As such, we continue to be pessimistic about the company's short term cost control.
Our recommendation for Cerro Verde is HOLD and set a target price for 2013YE of USD25.54 with a potential appreciation (inc. no div) of +3%. The Credicorp Capital Team reduced its estimates for base metals when it included a growth estimate of 7.5% for China in 2013 (previously 7.9%). Accordingly, copper prices have fallen for the period but the long-term price (2013P USD7,950/MT; 2014P USD7,500/MT and long-term USD6,000/MT or USD2.72/lb) has remained in effect. If we adopt a long-term price of USD5,512 (USD2.50/lb, the most conservative estimate in the Street), the TP would be USD23.84.
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