Minutemen Equity Fund

Research Report

Southern Copper Corporation (NYSE: SCCO)

Recommendation: Buy Current Price: $36.15 Target Price: $43.68

Nick Ziner and Dan Cornelius March 2017

Company Overview Southern Copper Corporation, incorporated in 1952, owns and operates open pit mines and metallurgical complexes that produce copper, silver, molybdenum, zinc, and other precious metals. Southern Copper Corporation conducts its mining operations in Peru and Mexico. SCCO operates two mining complexes in Peru, Cuajone and Toquepala, which combined represent the Peru segment that contributes 33% of total revenue. In Mexico, SCCO operates two mining complexes, La Caridad and Beunavista, as well as an IMMSA Unit which is five underground mines that act as a separate business segment. La Caridad and Beunavista account for 60% of total revenue for the Mexican open pit segment, while the IMMSA unit contributes for the remaining 7% of total revenue. Copper makes up the largest percentage of revenue at 79% in 2016. Silver contributed to 5% of revenue, molybdenum made up 5%, zinc accounted for 4%, and other metals all generate 7% of total revenue. Business Model: Peru: Toquepala and Cuajone mines; make up 16% and 19% of total copper production Mexico: La Caridad and Buenavista mines; make up 15% and 50% of total copper production

Market Cap 27.94B

EV/

EBITDA 13.6

P/E (ttm) 36.42 EV/Sales 5.59

P/E forward 20.67 Beta 1.183

P/B 4.83 EBITDA (ttm) 2.2B

P/S 5.2 P/FCF 26.77

D/E 1.01 Div/

Yield .88%

2Y Stock Chart

Copper generates 79% of SCCO’s total revenue, so it is very important to understand copper’s production in their five mines. Buenavista’s copper production increased 57% in FY16 due to a second concentrator that was installed and nearly doubled the total ore that was mined in the previous year. This tremendous feat was the major contributor to copper’s 21% increase in total production. La Caridad’s copper grade in mined material has increased marginally over the past two years to 0.355%, which explains its slight copper production increase over the past two years, as when copper grades increase more copper can be extracted and produced. The IMMSA Unit has increased annual operating days from 234 in FY15 to 353 in FY16, which mainly contributed to its 15% copper production increase. The previous 234 operating days was due to delays from floods in the underground mines. Toquepala has remained constant in copper production over the past two years, while Cuajone decreased 4% in production because its copper grade in mined material decreased 0.017% to 0.649%. Total Metal Production:

As stated above, Copper has increased its production by 21% in FY16. Zinc production gained about 20% after a full year of production without any flooding issues in the mines which caused production to be lower in the prior years. Also, Silver production increased 22% due to more targeted production at the Buenavista and IMMSA mines. However, Molybdenum production

decreased 7% in FY16, largely because its ore grade in mined material slightly decreased in the Cuajone, Toquepala, and La Caridad mines. Overall, the consistent significant increases in copper production and which should continue to support the growth in the other metals that are a by-product of copper production points to continued focus on growth for all facets of the business model. Sales by Metals and Mines – 2016 vs 2015:

As shown above, sales in each product category increased in FY16 with total sales increasing about 7%, this is due to SCCO’s mining effectiveness and a favorable price and sales mix in most metals. Even with copper’s decrease in price per pound from $2.50 to $2.21, copper was still able to increase revenues by about 6% in FY16. Silver grew its revenues the most in FY16 at 30%, which stems from its newly targeted production in the Mexican and IMMSA mines. The two Mexican mines combined for a 19% increase in sales, stemming largely from Buenavista’s 57% increase in copper production. These Mexican mines are growing and now make up 60% of SCCO’s total revenue. Peru’s two mines sales declined by 11%, mainly driven by Toquepala’s and Cuajone’s combined 5% decrease in copper production.

Copper Price per Pound Vs Sales:

Copper makes up 79% of total revenue and while total extracted production is an important factor, the price per pound of copper has a significant impact on SCCO’s top line. In 2015 Southern Copper sold about 180 million more pounds of copper in FY15 than FY14 which is a 12% increase but the drastic 20% decrease in copper price caused a 13% decrease in total revenue. While copper prices have fluctuated due to various supply side and demand drivers, SCCO has proven to be a resilient company by continuing to ramp up copper production selling significantly more pounds of copper each year and anticipating the needs of the future copper market which point to undersupply. Temporary price changes have not forced SCCO to change its outlook and goals, for example, in FY16, copper price dropped another 12%, but pounds of copper sold grew 18%, along with an increase in total revenue of about 7%. SCCO can still generate strong sales growth during a 12% decline in copper price. Additionally, net income grew 5.4% under lower copper prices mainly due to SCCO’s industry leading minimal cost of mining. Copper Sales by Geography: FY16 from FY15: Latin America – 38.4%, down from 48.2%

o Mexico – 26.2%, down from 32.5% Asia – 23.2%, up from 19.9% U.S. – 19.5%, up from 17.1% Europe – 18.9%, up from 14.8% SCCO’s FY16 copper sales are much more diversified in terms of geography. In the past, almost 50% of its sales have been purchased by Latin America with the majority coming from Mexico. A more diversified operating model keeps sales from depending on one location and allows SCCO to reliably capitalize on demand in more than one geographic area.

Copper Outlook: Global Copper Industry Position: The global copper industry is one of the largest commodity industries in the world in terms of production. In 2016, about 19.4M tons of copper were produced. In such an enormous market, there are no companies that dominate the industry with a global production share of over 10%. However, there are multiple mining companies that generate a 5-10% share of global production. Codelco, a Chilean state-owned copper producer, is the largest producer with a 9.7% share of the global production market. Freeport-McMoRan is the second largest producer with an 8% stake in the global market and operates mainly in Indonesia. BHP Billiton, an Australian based producer, is the third largest copper producer with 6.1% of total production. Next, Glencore represents 5.5% of global copper production, and it largely operates African mines. Finally, SCCO comes in as the fifth largest copper producer in the world, owning a 5% share of the global copper production market. However, even as the fifth largest producer, SCCO is estimated to hold the world’s largest copper reserves in its mines. Also, it is important to include that Chinese state-run copper mines produced about 1.66M tons or 8.7% of global copper production in 2015, because China itself consumes about 40% of copper in total. Due to their massive consumption, China’s economic strength plays a huge role in the industry. Copper Staying Power: Copper is mainly used in building construction, electric power generation and transmission, electronic product manufacturing, and the production of industrial machinery and transportation vehicles. Also, copper wiring and plumbing are integral to all appliances, such as heating and cooling systems, and piping in homes and businesses. Increases in construction of houses, buildings, cars, and electric power systems require a constant supply of copper. Therefore, in a time period of constant construction and electronic configuration, copper will continually play a vital role in the world. Investment Rationale

1. While SCCO’s major competitors are losing market share from cutting production and fighting strikes and work stoppages, SCCO will be significantly increasing its market share through continued mining efficiency and additional production from new mining explorations/projects.

Major Competitors Are Losing Market Share: FCX: Freeport-McMoRan is the second largest copper producer in the world with an 8% share of the global industry. However, Freeport’s cornerstone mine in Indonesia was forced to suspend mining at the end of 2016. The Indonesian government previously was working on Contracts of Work (COW) but at the end of 2016 it forced all mining companies in the country to reapply for a new type of work permit called a IUPK which is a special mining permit. This has prevented Freeport from exporting from the mine and due to limited storage capacity it cannot conduct any operations. This standstill has gone on for three months now with no resolution in sight, and the consequences are staggering. Most recent news states that Indonesia wants a majority share in the Freeport Indonesia subsidiary and 51% share control in 10 years, it is unclear how Freeport will proceed with negotiating or exit its Indonesian investments if the government does not cooperate. Grasberg, the name of this Indonesian mine, is the world’s second largest copper mine. It accounts for 30% of Freeport’s copper production, 95% of Freeport’s gold production, and about 25% of Freeport’s revenues. This ongoing gridlock is causing Freeport to lose significant business and has even pushed copper prices higher. Additionally, in Freeport’s major Peru mine, Cerro Verde, union workers have gone on strike to demand better pay and this has caused a complete shut down in the mining operations as well, another supply source that is offline for an unforeseeable amount of time pushing prices of copper up. GLEN: In order to begin reducing its debt, Glencore suspended mining operations in its Mopani Copper mines in 2016 for 18 months, which amassed to a cut of approximately 400K tons of copper or about 27% of its total production. Unsurprisingly, Glencore reported its lowest profit in its history as a public company after these mines were halted. These mines are still suspended for another few months, and the fourth largest copper producer will continue to lose its market share. BHP Billiton: BHP, the majority owner of the Chilean mine Escondida, recently experienced a union strike that was only just resolved. This mine accounts for 5% of global production and the 6-week strike was estimated to cut 1% of global production. While the strike has been resolved it has actually only delayed the problems for another 18 months as workers were able to use a loophole in Chilean law that gives unions the option to continue under their previous contract terms for an additional 18 months. Also, Chilean labor laws state that it is illegal to reduce benefits to workers from the last contract, so the current contract become a floor for the workers in any future negotiations and the labor laws will make it illegal to replace striking workers further complicating any future negotiations and production strikes. China: China’s massive amount of government debt has been funding the majority of their mining projects over the years. As their economy has slowed and the debt stacks up, the

government is focusing more on consumer spending and is putting less money into their copper mines. This retracts copper production from Chinese mines, which account for 8.7% of global production, and leaves more of an industry share for other mining companies like SCCO. Continued Mining Efficiency: As other major copper players are losing production from their mines, SCCO’s mines are operating at extremely high levels of efficiency. SCCO lead these top 5 companies in terms of copper production growth in both FY15 and FY16, posting 10% and 21% production increases respectively. These increases in production largely stem from the growth in operating capacity of its four major open-pit mines. For example, Cuajone operated at 95.4% of its full capacity all year, and Toquepala operated at 92.9% of full capacity. Furthermore, Buenavista operated at 99.5% of full capacity all year, while La Caridad operated at an astounding 99.9% of full capacity. All four major mines are exceeding expectations, proving SCCO’s unmatched mining efficiency. Along with increased production capacity and operating at high levels of operating efficiency, SCCO has the lowest cost in the industry of per pound production compared to the other major miners. This allows SCCO to remain profitable even if copper prices fall but also to capitalize the most from an increase in copper prices.

New Promising Mining Explorations/Projects: SCCO has begun a concentrator expansion project on the Toquepala mine. This project will be finished in 2Q18 and is expected to increase Toquepala’s copper production by 220.4M pounds in 2018 and 573M pounds in 2019. These are drastic improvements, considering Toquepala only produced 311.8M pounds of copper in 2016. However, SCCO has shown a history of success in

increased production when expanding concentrators. Specifically, Buenavista’s copper production increased 359M pounds or 57% in 2016 after installing a second concentrator. In another project, SCCO is installing a primary crusher with a new conveyor system that moves the ore to the concentrator in the Cuajone mine pit. The new conveyer system will optimize the hauling process and reduce operating costs by replacing the previous rail haulage. Also, this new crusher will have a mining material processing capacity of 43.8M tons per year. The total material mined in 2016 was 209M tons, so this project will increase mining material production by 21%, which can translate to an increase in copper production of 21%. The new crusher and conveyer belt will be fully installed by 2Q17. Overall, SCCO has the goal of increasing organic production of copper by 66% to 1.5M tons by 2023, this is significant as 2017 projections are 900,000 tons of copper. Three major new mining projects are Tia Maria, Los Chancas, El Arco, Pilares and El Pilar. Tia Maria and Los Chancas are projects in Peru that are open pit mines with production estimated at 120,000 tons and 100,000 tons annually respectively or 486M pounds per year total. The El Arco, Pilares and El Pilar mines are also open pit mines in Mexico, El Arco is estimated to produce 200,000 tons of copper and significant gold by-product and Pilares and El Pilar will produce 35,000 tons annually each. Together this represents an increase of 270,000 tons or 596M pounds of copper output annually. These projects are to come online progressively through 2017 to 2023 to satisfy the goal of 1.5 million copper tons annually by 2023.

2. Copper is facing a supply deficit in upcoming years and SCCO is in a tremendous position to benefit from the increasing industry demand and increasing copper prices.

Copper Supply Deficit in Upcoming Years: In 2015 and 2016, copper prices fell from $3.11 per pound to $2.50 and $2.11 per pound. These significant declines were a reaction to China’s economic slowdown in 2015, who accounts for 42% of all copper consumption. Without China’s usual immense copper consumption, demand faltered. As a result, copper prices were slashed and the majority of mining companies started to cut back on copper supply. Global copper production increased only 1.5% in 2016, which is the smallest increase in the past 6 years. Meanwhile, the majority of the largest mining producers have recently run in to serious mining struggles. For example, because of debt, GLEN has cut production by 27% and Chinese mines have started to lose funding. Also, with FCX’s cornerstone copper mine going on strike in late 2016, FCX is losing 30% of their copper production. Furthermore, Chile’s copper ore grade has been continuously decreasing over the years, and Chile is the world’s largest copper producer.

Combining the overall production cut due to lack of demand with the recent mining struggles of the most prominent copper suppliers, the global copper supply is not increasing at a pace that will keep up with upcoming demand. SCCO’s management expects supply growth of .5-1% for the year and demand growth of 2-2.5% representing a deficient in the market. Increasing Copper Demand in Upcoming Years: As mentioned previously, copper is mainly consumed for electric wires and products, building construction, transportation equipment, and industrial machinery and equipment. Many of these areas will have an increased demand in the upcoming years. Despite China’s past economic slump, their recent bounce back in copper imports has been a very positive sign for copper demand. Recent construction contracts have increased construction activity by 5.6% in late 2016. Also, Chinese imports for electrical wiring, electrical grids, and car production have all started to pick up by a few percentage points. Copper is seen as a proxy for the overall health of the market and the continued more positive than expected market continues to support these growth fundamentals in key markets such as China. The US only accounts for 8% of all copper demand, but its 9.7% housing growth in FY16 and its PMI Index value reaching historical levels in 2017 are great signs for future copper consumption. Additionally, if the $1 Trillion infrastructure plan follows through, a significant increase in copper demand will be required. Also, many countries are moving toward renewable energy and solar panel installation. Furthermore, data towers are being installed, IoT and electric cars are beginning to develop requiring more copper, and semiconductors are on the rise as tech continues to advance in everyday uses. In 2017, global construction is forecasted to increase 5%, which stems from India expanding and Europe’s recovery of basic metal consumption. In total, all of these projects contribute to the expected rise in copper demand, and companies with increasing output will be able to capture this growth. This puts SCCO in a better position than many other miners to capitalize on the demand, because SCCO’s production growth has been unmatched in the past two years and its falling competitors has set them up to gain market share.

Copper Prices Will Rise: As global copper supply from the major companies has begun to stall and the copper demand from China and other prominent countries starts to recuperate, copper prices will begin to rise. Additionally, copper is one of the most utilized metals relative to its abundance in the Earth implying that copper prices will go up on scarcity concerns too. In the long run the cheap copper will have already been mined and it will not be economically viable to extract lower grade copper. New copper is constantly needed for many uses so this will have to forces prices up in

the long run. While copper is similar to gold by nature of being able to recycle all copper that was ever mined, newly mined copper is still necessary for many specific uses and recycled copper can not replace it. The era of cheap copper will end and while we won’t completely run out of copper, new copper is going to be at lower grades making it more expensive. In 2017, copper price per pound has risen to $2.60 on a variety of factors such as infrastructure spending, mine shut downs, stockpiling and other market forces. This price increase will have a significant positive impact on SCCO’s top and bottom line as it delivers copper at increased prices.

3. SCCO is the only copper producer with the reserves capable of consistently gaining a stronger market share and supplying the increasing copper demand in the long term.

Undisputed Leader in Copper Reserves: SCCO’s copper reserves are estimated to total about 70.1M tons of copper, which is 3.6X more than the total copper production in 2016 and 78X more than SCCO’s total copper production in 2016 meaning SCCO has substantial untapped reserves. For example, FCX, the second largest global copper producer, has only 36.6M tons of copper reserves. This is almost half of SCCO’s copper reserves. Other major companies with a high market share of global copper production, like BHP and Glencore, have only 33.7M and 27M tons of copper reserves respectively. The only mining organization that comes close to SCCO’s copper reserves is Codelco, who accounted for the highest percentage of global copper production in 2016 at 9.7%. Their copper reserves are estimated to hold 56.7M tons of copper, which is still 14.4M tons of copper short of SCCO’s reserves.

These massive reserves allow SCCO to consistently ramp up copper production, which they have been able to take advantage of in the past few years. As stated previously, their copper production increased 9.8% in 2015 and 21% 2016. Specifically, Buenavista has been able to tap into these reserves more prominently in 2016 with their new concentrator, resulting in a 57% increase in production at SCCO’s largest mine. As similar expansion projects in Toquepala and Cuajone begin to finish up, copper production is expected to expand to new levels eventually targeting 1.5 million tons in 2023. This allows SCCO to take advantage of the increased copper demand for years to come, as well capture market share from the other major competitors that have less reserves, a higher cost of extraction and less production expansion capability than SCCO. Therefore, SCCO is in the best position to become the world’s largest copper producer in the long run.

Industry Analysis & Competition Headwinds & Tailwinds: To understand the global copper market, it is important to look at what drives demand the most. China is currently the largest consumer of copper at 42%, followed by the United States at 9%, There are a variety of uses for copper that explain why China demands 42% of the global production. Copper is used in last mile internet transmission lines, automobiles, housing, semiconductors, appliances and a variety of other infrastructure and transportation uses. While China is the largest consumer of copper it is not the largest producer, Chile alone produces ⅓ of the entire annual copper production. Other countries include: Peru, Mexico, Indonesia, the United States, China and Australia the differences in supply and demand for each country creates the copper trade that is so critical. During China’s explosive economic growth, demand for metals increased faster than the amount of production that could be brought online. It takes on average 7 years to create a mine and 3-5 years to increase mine production. This led to prices rising and many companies borrowing to meet the demand of copper. Reliance on China causes supply and demand dynamics to shift dramatically if there are fundamental changes in the market. The commodity super cycle, starting in 2003, ended in 2014 and has been in a slow decline and only has begun to reverse in late 2016. The cycle ending was mainly due to a slower China growth rate as key statistics such as building sales in China have declined forcing copper prices down as well. China demand is recovering better than expected and 2 major themes of China stockpiling and hedging Yuan depreciation through copper, which is priced in dollars, and the growth prospects of higher United States consumption through increased infrastructure. Knowing the above demand drivers are just as important as knowing the supply drivers as they play a major role in determining output which will drive prices. A key theme seen in the beginning of 2017 are mining strikes, specifically at some of the world’s largest mines. Escondida, the world’s largest copper mine, accounts for 5% of global copper production alone, this mine was on strike and only recently has agreed to return to work, it is estimated that this strike took out 1% of global output. This mine is in Chile and is primarily owned by BHP Billiton. Additionally, Freeport McMoRan has recently run into issues in Indonesia at their Grasberg mine, their largest mine for copper and gold production, as the Indonesian government has revoked their contract of work until it is revised into a new form with concessions. Most recently news indicated that Indonesia wanted a 51% stake in the mine within 10 years, it is unclear if Freeport will agree to this to resume production or will continue to hold out for better terms even if it costs them copper production. Freeport is also dealing with a strike at their

Peruvian mine Cerro Verde. These three mines combined represent 11% of global supply. Structurally, supply has not grown and SCCO’s management sees weak production growth for the entire market at 0.5-1%, this will support higher copper prices. In summary, there are headwinds and tailwinds in the copper industry and some effect specific producers, like Southern Copper Corporation more positively than others. Headwinds to the industry include China demand weaker than historical averages, mine shutdowns, a lack of new copper coming on line. Some of these headwinds double as tailwinds for others, tailwinds to the industry are stronger than expected recovering Chinese demand, improved outlook on US consumption, contracting supply forcing prices up. Miners such as Southern Copper Corporation that do not experience mining shutdowns and continue to produce copper actually benefit from the headwinds as the higher price and increased market share will boost the company’s top and bottom line. Also, China pessimism may have been factored in and stronger demand numbers that continue to come out of China will only increase the favorability of copper fundamentals. Competition: Southern Copper Corporation’s main competitors are other geographically and diverse mining companies. The list of companies is: BHP Billiton, Rio Tinto, Vale, Freeport McMoRan, Codelco, Antofagasta, Glencore, and Anglo American. In analyzing the competitive landscape for copper production it is important to realize two important factors. One is that each miner is diverse in its mineral offerings as each mine has different geological deposits. When accounting for the same mineral in mining operations costs of production is the second important factor to determine. That is why it is important to look at the cash costs of production per company. This will determine what each company’s cost structure is and at what price mining copper is profitable and has decent margins.

As seen in the chart above Southern Copper Corporation has the lowest copper, followed by BHP Billiton and Rio Tinto. This supports the competitive advantage Southern Copper Corporation has been able to realize. Industry Prospects: Copper is one of the most critical metals for many key consumer and industrial uses due to its unique properties that allow it to be used for so many diverse products. Geologically speaking copper is the most over utilized commodity relative to underlying geological endowment. Going forward copper has new uses in electric cars, which is currently an important aspect of why China’s demand is picking up as they are the largest consumer of electric vehicles and traditional vehicles which also demand copper, semiconductor demand as more consumer electronics and the Internet of Things takes off pushing semiconductors into everything we own and use, further investment in internet lines, while fiber is better for last mile connections, a growing number of countries expanding internet connectivity will still use the cheaper copper lines to bring the internet to its people. Additional traditional uses of copper include, power transmission lines, appliances, general home uses (i.e. copper pipes) all of which are going to grow with a rising middle class in developing economies such as China, India, Southern Pacific Asia, Africa and South America. Knowing the diverse and growing uses of copper, forecasting demand can be done with reasonable certainty. In 2015 mine production of copper was 19,100,000 metric tons with a growth estimate from industry leaders of 575,000 metric tons annually. Forecasted 2016 production by the US Geological Survey was 19,400,000 metric tons. Whether the 575,000 metric ton growth is completely accurate it is well known that copper consumption is growing but discoveries of copper and new mines and expansions have not kept up. In the past three decades only 56 copper discoveries were made and estimates state that 21 of the 28 largest mines are not able to be expanded. While copper is not a fossil fuel that is gone once it is consumed, recycling copper is possible but new sources of copper will have falling grades, meaning it is costlier to extract and refine copper, driving prices further up. These factors do allow certain companies to benefit the most from these macro dynamics and capitalize on the future of this industry. Miners will significant proven and probable reserves will benefit the most as they will have the most success in future extraction of copper. Then miners that have the lowest costs for mining will also be able to benefit even as grades of copper begin to slip and the extraction process becomes more expensive. Finally, companies will the strongest balance sheets will be able to survive the ups and downs of price and production fluctuations. Industry indebtedness peaked in 2014 at $283 billion and has been reduced but peers still have total debt to EBITDA leverage ratios of 4.6x (Anglo American) 4.1x (Freeport McMoRan) and

2.8x (BHP Billiton). Significant price declines can negatively effect the most indebted companies forcing drastic measures of asset sales and raising capital. Selecting a company within the industry that meets these three criteria will result in a strong long term player within the industry that will be able to realize significant growth and benefits. Management CEO – Oscar Gonzalez Rocha; CEO since 2004 CFO – Raul Jacob Rodriguez; CFO since 2013 Rocha, received a salary of $489,918 in 2015 with $465,530 in bonuses and $1,072,673 in other compensation. These bonuses stem from profit sharing with the Peruvian Branch and holiday bonuses. Total compensation comes to $2,037,121. Rodriguez made a base salary of $145,119 in 2015 with about $226,605 in bonuses. These bonuses also come from Peruvian profit sharing. Total compensation comes to $371,724. The firm elects not to give share based compensation to any of its Named Executive Officers and has not done so since 2000. Cash bonuses, such as Mr. Rocha’s $465,530 in 2015, is used to buy shares in the parent company Grupo Mexico and are deposited in a trust. Strategy & Future Direction of the Company: Management has decided to focus on expanding its current mines to increase metals production, rather than purchase an existing mine. Management is also working on developing several new mines to increase production in the long term. This is because new mines are extremely expensive and take several years to start production, and they already have the largest copper reserves in the world in its 4 current mines. Therefore, management has made a commitment to expand its current mine’s production. This can be seen through Buenavista’s second concentrator being installed in 2016 and their production increasing by 57% as a result. Also, management has two projects ready for completion this year and in 2018 that bring an extended concentrator to Toquepala and a new state of the art crusher to Cuajone. New mining operations that management has in development include Pilares, Tia Maria, El Arco, El Pilar, and Los Chancas these mines represent the additional organic growth needed in order to reach a production of 1.5 million tons annually. Overall, the main focus is to produce 1.5M tons of copper by 2023, up from 899,995 tons in 2016, by making extensions to each mine. Capital expenditures are forecasted to be $1.1 billion for 2017, $1.6 billion for 2018, $1.2 billion for 2019, and then significantly drop each year to $500 million in 2021. This comes from the two

new projects SCCO will be finishing up in the next few years, as well as potential projects that will likely get the green light around 2018, including two new SX-EW facilities in Peru that should generate over 310,000 tons of copper for the early 2020s. Management has had success in making sure these projects are completed on time or ahead of schedule and under budget. Debt to equity is slightly less than a 1:1 ratio, but 79% of this debt is due past 2035. This shows that SCCO has time to cut down its long term debt and has done a good job of taking care of its debt due in the shorter term. Free cash flow will also support operations and debt repayments going forward while still paying dividends and returning capital to shareholders. SCCO has increased its dividend payout to $0.08 a share per quarter in 2017, up from $0.05 a share per quarter in 2016. SCCO has consistently paid a dividend since its inception in 1996, but the dividend has certainly fluctuated in the past based of conditions in the mining industry. Risks Copper and the copper industry exist in a challenging global environment constantly affected by macro trends or firm specific issues. While it is impossible for Southern Copper Corporation to completely isolate itself from these risks it has taken preemptive measures in doing so, which can be seen in their operating performance and success through challenging times. The three major risks to Southern Copper Corporation are:

1. Mine work stoppage either caused by government or workers forcing the stop 2. Failure to realize demand or oversupply thus causing price collapse 3. Expansion and production goals failing to be met due to industrial accidents,

environmental issues and other delays that can negatively impact operations No company is immune to these risks due to the inherent risk of doing business, specifically risk from governments in countries with instability or are not business friendly, and environmental risks such as floods, landslides and more. Other risks such as mine worker unions can be mitigated within reason assuming mining union issues are addressed in a timely manner, and preventable industrial accidents do not happen when safety standard are met. Mine work stoppage caused by workers or the government: due to the nature of the business both the workers or the local government usually have the power to halt production at the mining site. This has been seen this year with BHP Billiton experiencing a union strike at the world’s largest copper mine for six weeks, and Freeport McMoRan’s Cerro Verde mine in Peru also staging a worker strike. Additionally, Freeport’s largest mine Grasberg has experienced a

shutdown to a conflict with the Indonesian government. At this time producing mines that Southern Copper Corporation operates comply with the local government and union workers are reporting for work. Failure to realize demand or oversupply causing a price collapse: Copper is typically called Dr. Copper as it usually has the ability to predict economic conditions based on its price movements, thus many industry analysts speculate whether copper is going up or going down and a vast number of people have their own opinion on the direction. The two main camps relate to higher prices or lower prices. In terms of higher prices many see that the industry is not keeping up with demand for China and supply will lack forcing prices up, while this is positive for firms that continue to raise production goals it could result in the eventual oversupply in the market that would cause prices to fall when companies expand to much and the cost to pull copper out of the ground is higher than the price in the market. This is a serious risk to the growth of the copper industry as it takes on average 7 years to start a mine and several years to expand one, these decisions need to be carefully considered and future prices of the commodity will affect the project’s success. The opposite camp believes that copper will head lower as China’s commodity boom is over and large demand will never drive the metal to its historic highs again. In either scenario price sensitivity is very important for the bottom line and for deciding in future expansions. Copper is one of the most consumed metals so demand in some form will exist and when prices dip, companies that have the cheapest cost of production will remain relatively stable and meet its obligations. This can be seen in the recent history of Southern Copper Corporation as it was one of the few producers that stayed EBITDA positive will prices fell. Along with a reasonable debt load and liquidity it could still meet its obligations and fund capital expenditures for maintenance and new projects. Expansion goals and production goals failing to be met due to industrial accidents, environmental issues and other delays that negatively impact operations: Industrial accidents increase in open pit mines as they are expanded as the slope of the mine going into the ground increases, this can increase risks in the mine and possibly lead to a delay in production. A rock slide has previously happened coupled with a construction defect in the seal of a pipe at a new leaching system containment dam, which caused a spill of copper sulfate solution into the Bacanuchi River, a tributary of the Sonora River. As a result of this accident Southern Copper Corporation absorbed charges of $45.0 million and $91.4 million in its 2015 and 2014 results. Making sure safety standards are met are key to insuring these accidents are minimized if they occur. Environmental issues that cannot be controlled pose risks as well, zinc production for 2014 and 2015 was limited due to flooding in the mine in 2016 this was resolved and zinc production increased dramatically. Additionally, expansions are not cheap nor easily executed delays or cost overruns can negatively impact the company as well. Currently, all expansion projects are under budget and are expected to be completed on time. As these risks are ever

present in these companies, Southern Copper Corporation has ensured that all available prevention measures are in place by complying with safety and projects are well executed allowing them to continue to succeed in their operations and meet their goals. Valuation Revenue Assumptions: Southern Copper Corporation reports in 3 major business lines which are Mexico, Peru and IMMSA, but rather than project each mine’s output, revenue assumptions are based off total metals mined across all business segments. These include: copper, silver, molybdenum, zinc and other. SCCO has mine specific output capabilities so by understanding production rates per mine a total specific metal output can be derived. Management clearly states copper production in the looking forward statements and using management’s guidance revenue is estimated based on if production targets will be maintained, exceeded or under the estimated production amount. Taking production of each metal is the volume half of revenue and by taking analysts and market expectations for commodity prices, average price realized can be solved for each year. Multiplying these two factors together will solve for revenue per metal segment and overall revenue growth. Management states copper production for the next 5 years will be as follows: 2017 – 900,000 tons 2018 – 972,300 tons 2019 – 1,013,00 tons 2020 – 1,130,00 tons 2021 – 1,147,000 tons With the rate of projects coming online these numbers are very clear, we conservatively estimated that management will make most of these targets but with the qualitative belief of managements past success with expansions being under budget and on schedule, the production targets are manageable. Combining this with the JP Morgan copper price schedule and applying a more conservative price, copper revenues are attained. Management also guides one year forward for silver, molybdenum and zinc production. Applying conservative growth rates that management explains through growth in extraction of copper, as these metals are by-products, estimated metal production is forecasted. Similarly, to copper prices, the JP Morgan price schedule for each commodity is used as a base but reasonable

conservative estimates on prices are also used. This is done as our fundamental view is prices remaining on an uptrend but to avoid taking a specific directional on any volatile commodity price. This is to remain more bullish on managements ability to deliver more production rather than rely on prices in the price/volume mix. 2020 revenue growth is larger due to the completion of many 2018 expansion projects and a structural deficit that is still being felt in the supply side growth pushing prices higher, JP Morgan predicts 3.18 vs the conservative 3.10 as seen below.

Cost of Goods Sold Assumptions: The cost of goods sold rise as the number of mines and new mine projects come online. The breakdown of costs is seen in the pie chart for the most recent year. Each mine has very specific costs depending on each of these factors but historically the costs have not stayed constant. Rather than take a direction on each of these factors, estimates were made on most recent margins and the proportional increase in these costs as more resources are need for each mining operation. For analyst comparison, Bloomberg gross profit was used to determine if similar costs were estimated in other research. For the available Bloomberg projections, costs are in line but slightly below as

management is resourceful and can keep costs in check. These cost will grow as a percentage of revenue with increased production and the challenges that may cause until operational efficiencies are maximized, and in 2020 reaching 60% cost of goods sold and a 40% gross margin, which is also historically in line. Operating Expense Assumptions: Historically Sales, General and Administrative expenses have been 1.8% sales and as sales grow the proportion of spending in this expense will not have to increase to keep up with operations, therefore it is kept steady at 1.8% of sales. Other operating expenses have been slightly more variable but to remain conservative a 1% of sales is applied. Depreciation, Depletion and Amortization Three of the most important noncash expenses to SCCO are depreciation, depletion and amortization due to the capital intensive nature of the business. Depreciation and depletion will be around 2016 levels in 2017 and 2018 but as new mining projects start up the amount of these expenses will increase, most of the useful life of each mine is around 10 years so adding in the machinery and other long term assets support the 2021 13% of revenue as Property, Plant and Equipment continues to grow. Amortization, for intangibles such as their mining software, is given on a fixed schedule and are therefore absolute values as the amortizing of these intangibles will not change, this represents a less than .1% of revenue. Capital Expenditures, Income Tax and Working Capital Assumptions: Management guides for a very conservative 30% tax rate, as the mining industry in Mexico and Peru has several additional taxes and royalties levied on them, additionally the guidance states that SCCO is paying the highest effective tax rate in the United States, assumptions going forward do not take into account corporate tax reform. Historically income tax as a percentage of EBIT has been less than 30% and there are deferred taxes and deferred tax assets that reduce the tax burden, these are also not factored into tax assumptions in order to still maintain a conservative estimate. Capital expenditures follow a very clear 5-year timeline as the Board must approve managements spending for new projects and estimates on mine maintenance capital expenditures. Management states the following for 5-year capital expenditures verse the model’s given dollar amount for capital expenditures based on a percentage of sales.

2017 - $1.1 billion vs $1,126 billion (17.5%)

2018 - $1.6 billion vs $1.608 billion (23%) 2019 - $1.2 billion vs $1.224 billion (16%) 2020 - $800 million vs $805 million (9%) 2021 - $500 million vs $513 million (5.5%)

Management is ramping up capital spending in the next two years to meet their production goals of 1.5 million tons of copper by 2023, and these mines take several years to get online. Additionally, with slight variance, estimates on capital expenditures are in line to managements guidance which historically has been correct as projects have been under budget and on time. Finally, working capital has a 5-year average of 13.8% of revenue. With the continued growth of mines management expects a light increase in working capital as a percent of revenue as inventories may rise with higher capacity, therefore a conservative 16% is applied. Final Valuation: Below is the valuation, included is the cost of debt, cost of equity and final valuation. The complete model will be embedded in the document.

SCCO Bloomberg.xlsx