Southern Copper CorporationSCCO continues to witness the benefits of cost-reduction programs and expansion actions. Backed by a positive 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. However, lower copper production in fiscal 2018 and high leverage remain concerns.
Here we take a quick look at the primary factors that have been plaguing Southern Copper and discuss the prospects that ensure near-term recovery.
What's Deterring Southern Copper?
Lower Production: In the first quarter, the company's copper production decreased 4.2% year over year dragged down by a lower production at the Buenavista SX-EW plant. This can be attributed to the lower solubility index in the new leach pads and the characteristic of the ore 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 cut down its copper production guidance for fiscal 2018 by 30,000 tons to 901,000 tons.
High Debt Levels: The company's debt-to-equity ratio is currently at 93%, which is a cause of concern.
Why Should You Still Hold?
Ahead of the Industry: Shares of this Zacks Rank #3 (Hold) company have gained 15% over the past year, outperforming growth of 3.8% recorded by the industry . The company flaunts a value score of B.
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 poised to continue delivering enhanced performance.
New Projects Hold Promise: 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 perfectly 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.
In 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 anticipated 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.
Improved Outlook for Metal Prices: 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 . 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.
Stocks to Consider
Investors interested in the basic materials sector might take a look at a few better-ranked stocks like KMG Chemicals, Inc. KMG , Methanex Corporation MEOH and BHP Billiton Limited BHP , each carrying a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here .
KMG Chemicals has an expected long-term earnings growth rate of 33.2%. Its shares have gained roughly 48% over a year.
Methanex has an expected long-term earnings growth rate of 15%. The company's shares have rallied around 51% in a year.
BHP Billiton has an expected long-term earnings growth rate of 5.3%. Its shares have shot up roughly 24% over a year.
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