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

Zacks Equity Research

On Dec 18, we issued an updated research report on Southern Copper Corporation SCCO. The company is poised to grow on the back of expansion projects, benefits of cost-reduction programs and solid long-term outlook for metal prices. However, high debt and lower copper production for fiscal 2018 at its Buenavista SX-EW plant remain concerns.

 

Expansion Projects on Track 

 

In the first nine-month period of 2018, capital expenditures were to the tune of $832 million, 17% higher year over year. For 2018, the company has lowered capital expenditure target to $1.1 billion as it has rescheduled part of its capital expenditures in 2019. The company plans to increase copper production capacity to exceed the one million ton milestone in 2018 and expects to reach 1.5 million tons of copper production by 2025. In Mexico, the company has a planned investment of $413 million in the Buenavista Zinc-Sonora project which includes the development of a new concentrator to produce approximately 80,000 tons of zinc and 20,000 tons of additional copper annually. Once completed, this new zinc concentrator is likely to double the company's zinc production capacity.

 

An investment of $159 million is estimated for Pilares-Sonora project in Mexico which consists of an open pit mine operation with an annual production capacity of 35,000 tons of copper in concentrates. It will significantly improve the over-all mineral ore grade. In Peru, a new-state-of-the-art concentrator for $1.3 billion at the Toquepala project will increase annual production by 100,000 tons to reach 258,000 tons in 2019, a production increase of 74%. In addition to these, the company has number of other projects that it may develop in the future.

 

Immense Growth Opportunities in Peru

 

In June 2018, Southern Copper completed the acquisition of Michiquillay project in Cajamarca, Peru, which boasts mineral resources of 1,150 million tons and a copper grade of 0.63%. It will produce 225,000 tons of copper annually and by-products such 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. It is likely to become one of the largest copper mines in Peru.

 

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.

 

Increase in Long-Term Metal Prices to Boost Revenues

 

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. However copper production has been affected by persistent decline in investments that several companies have had in recent years. On top of this, labor unrest, excess government taxation and technical difficulties are impacting production further. All these factors will restrict supply growth. This demand-supply imbalance will eventually drive copper prices.

 

Molybdenum prices are set to increase on the back of healthy demand from the oil and gas industry, and decline in supply growth. Long-term fundamentals for zinc remain strong due to its significant industrial consumption and expected mine production shutdowns. Further, silver prices are likely to gain driven by its industrial use and impending demand-supply imbalance.

 

 

Shares of Southern Copper have dipped 30.6% in the last year, compared with the industry’s decline of 35.2%. The company continues to witness the benefits of cost-reduction programs and expansion actions. Backed by a positive current market outlook and constant commitment to increasing low-cost production and growth investments, Southern Copper is uniquely positioned to continue delivering enhanced performance.

 

Lower production at Buenavista SX-EW plant to Impact Results

 

In the first nine-month period of 2018, copper production decreased 0.3% year over year dragged down by a lower production at the Buenavista SX-EW plant. This was owing 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. Though the company expects a sequential increase of 18% in copper production for the facility in the fourth quarter, it has led to lower production for the full year. The company has cut down copper production guidance for fiscal 2018 to 885,000 tons from the prior 901,000 tons.

 

Further, copper prices have been down this year owing to the ongoing trade tussle between the United States and China. This is likely to weigh on Southern Copper’s near-term results. The company's debt-to-equity ratio is currently at 90%, which is a cause of concern.

 

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

 

Some better-ranked stocks in the sector include Israel Chemicals Ltd. ICL, The Mosaic Company MOS and Cameco Corporation CCJ.

 

Israel Chemicals has an expected earnings growth rate of 19.4% for the current year and a Zacks Rank #2 (Buy). The company’s shares have rallied 36% over the past year. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

 

Mosaic has an expected earnings growth rate of 75.2% for the current year and a Zacks Rank #2. The company’s shares have rallied 24% in the past year.

 

Cameco has an expected earnings growth rate of 66.7% for the current year and a Zacks Rank #2. Its shares have gained 11.4% in a year’s time.

 

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