Southern Copper Bets on Peru for Growth, High Debt a Concern

On Jun 26, we issued an updated research report on Southern Copper Corporation SCCO. The company is poised to grow on the back of expansion projects and solid outlook for metal prices. However, high debt and lower copper production for fiscal 2018 owing to a corrective program at its Buenavista SX-EW plant remain concerns.

Southern Copper reported net income of $470.7 million or 61 cents per share for the first quarter of 2018, compared with net income of $314.4 million or 41 cents a year ago, driven by higher sales and cost control initiatives. Net sales went up 16.2% year over year in the quarter to $1,841 million backed by higher sales volume of copper, zinc and molybdenum.

In February 2018, Southern Copper won the public bidding process for the Michiquillay project in Cajamarca, Peru. Michiquillay is a world-class mining project with mineral resources of 1,150 million tons and a copper grade of 0.63%. It will produce 225,000 tons of copper annually along with such by-products as molybdenum, gold and silver, at a very competitive cash-cost. Michiquillay offers immense growth opportunities for the company and fits into its portfolio of mining projects in the Americas, especially in Peru. The estimated capital investment is around $2.5 billion and is likely to start operations in 2022. It is likely to become one of the largest copper mines in Peru.

During the second quarter of 2018, Southern Copper will complete the Toquepala expansion project in Peru. It is anticipated to add 100,000 tons to the company’s annual copper production capacity, with lower cash cost per pound of copper.

The new administration in Peru is expected to provide stability, economic growth and social progress along with a favorable environment for the company to develop its projects of Tia Maria, Los Chancas and Michiquillay, with a combined investment of $6.7 billion. When in operation, these projects will increase the Peruvian copper production by about 500,000 tons. Peru is currently the second largest producer of copper and its national output is expected to hit 4.8 million ton per year by 2021 — double the output of 2017.

In the first quarter of 2018, approximately 80% of Southern Copper’s revenues came from the sale of copper, 7% from molybdenum, 5% from zinc, 4% from silver and 4% from various other products, including gold, sulfuric acid and other materials. Driven by the synchronized economic growth of the major world economies, refined copper demand is expected to rise between 2.5% and 3.0% for fiscal 2018. Copper production has been affected by consistent decline in investments that several companies have had in recent years. On top of this, labor unrest, excess government taxation and technical difficulties are further impacting production. This imbalance will bolster copper prices.

During the first quarter of 2018, the average molybdenum price improved by 56.8% year over year. Molybdenum is mainly used for the production of special alloys of stainless steel that require significant hardness, corrosion and heat resistance. A new use for this metal is in lubricants, sulfur filtering of heavy oils and shale gas production. Molybdenum prices are set to increase on the back of healthy demand from the oil and gas industry as well a decline in supply growth.

Zinc’s long-term fundamentals remain strong due to its significant industrial consumption and expected mine production shutdowns. Silver prices will be sustained by its demand for industrial uses as well as on safe haven demand in times of economic uncertainty.

Shares of Southern Copper have surged 36% in the last year, outperforming the industry’s growth of 16%. The company continues to witness the benefits of cost-reduction programs and expansion actions. Backed by a positive current market outlook as well as its constant commitment to increasing low-cost production and growth investments, Southern Copper is uniquely positioned to continue delivering enhanced performance.

In the first quarter, copper production decreased 4.2% year over year dragged down by lower production at the Buenavista SX-EW plant. This was due to the lower solubility index in the new leach pads and the characteristics of the ore that is being deposited in such pads. The company has developed a 12-month corrective program to overcome this temporary reduction in production. While the work on this program is underway, the company will produce 115,000 tons of copper from the SX-EW plants in Buenavista, which will trim copper production guidance for fiscal 2018 by 30,000 tons to 901,000 tons.

Further, the company’s debt-to-equity ratio is currently at 93%, which is a cause of concern.

Southern Copper currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the sector include KMG Chemicals, Inc. KMG, Domtar Corporation UFS and Ingevity Corporation NGVT. While KMG Chemicals sports a Zacks Rank #1 (Strong Buy), Domtar and Ingevity carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

KMG Chemicals has expected long-term growth rate of 28.5%. Its shares have appreciated 53% over the past year.

Domtar has expected long-term growth rate of 5%. Its shares have gained 21% over the past year.

Ingevity has expected long-term growth rate of 12%. Its shares have appreciated 43% in a year’s time.

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