On Aug 21, we issued an updated research report on Southern Copper Corporation SCCO. Backed by its largest copper reserves in the industry, focus on increasing low-cost production and investment in expansion projects, the company remains well poised for growth. The recent rise in copper prices also bode well.
Upbeat Production Numbers
The company’s copper production increased 2% year over year in the first half of 2020 courtesy of higher production at Peruvian mines (+9.5%) as result of the new Toquepala concentrator. Construction of the Toquepala concentrator expansion was completed in late 2018 and has been producing at full capacity since the June-end quarter last year. This expansion project has increased Toquepala´s annual copper production by 100,000 tons.
Molybdenum mine production increased 26.4% in the first half due to significantly higher production at all of the mines. A new molybdenum plant, which commenced operations last year, contributed significantly to the Toquepala mine output. Mined silver production increased 17.3% year over year in the abovementioned period driven by higher production across all the operations.
Metal Prices to Pick Up in the Long Term
Given copper’s widespread industrial use, the global slowdown in manufacturing activity weighed on copper prices this year. However, copper prices have recovered lately as demand in China has picked up while the impact of the pandemic on top producer South America has raised supply concerns.
The long-term outlook for copper remains positive as demand for the metal is expected to grow, driven by electric vehicles and renewable energy and infrastructure investments, However, grade decline, rising input costs, water constraints and scarcity of high-quality future development opportunities continue to constrain the industry’s supply. This demand-supply imbalance will push copper prices north in the future.
Molybdenum prices are set to increase on the back of healthy demand from the oil and gas industry and reduced supply. Molybdenum is primarily utilized for the production of special alloys of stainless steel that require significant hardness, and corrosion and heat resistance. A new use for this metal is in lubricants and sulfur filtering of heavy oils and shale gas production. Long-term fundamentals for zinc remain strong due to its significant industrial consumption and expected mine production shutdowns. Further, silver prices will gain eventually given its industrial use and impending demand-supply imbalance.
Industry Leading Reserves & Low Cost: A Winning Combination
Southern Copper has the largest copper reserves in the industry and operates high-quality, world-class assets in investment grade countries, such as Mexico and Peru. Backed by its constant focus on increasing low-cost production and growth investments, the company is well poised to continue delivering enhanced performance.
Solid Projects on Track
Southern Copper’s board approved projects in Peru with a total capital budget of $2.8 billion of which $1.6 billion has already been invested. Including the Michiquillay ($2.5 billion) and Los Chancas ($2.8 billion) projects, its total investment program in Peru runs to $8.1 billion. Peru is currently the second largest producer of copper globally and its national output is expected grow 27% by 2022.
In Mexico, the company has a planned investment of $413 million in the Buenavista Zinc – Sonora project. An investment of $159 million is estimated for Pilares – Sonora project in Mexico that includes an open pit mine operation with an annual production capacity of 35,000 tons of copper in concentrates. The El Pilar project, with an investment of $310 million is expected to be completed in 2023, will add 35,000 tons of copper annually. These projects, along with other investments in Mexico, will enhance the company’s Mexican operations’ copper and zinc production by 16% and 93%, respectively.
The company has number of other projects that that it may develop in the future, which will help it attain copper volume production target of 1.5 million tons by 2028.
The company’s shares have gained 55.8% over the past year, compared with the industry’s rally of 47.6%.
Zacks Rank & Other Stocks to Consider
Southern Copper currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Some other top-ranked stocks in the basic materials space include Galiano Gold Inc. GAU, Eldorado Gold Corporation EGO and Yamana Gold Inc. AUY, each carrying a Zacks Rank #2 (Buy) currently.
Galiano Gold has an estimated earnings growth rate of 1,600% for 2020. The company’s shares have surged 75.1% in a year’s time.
Eldorado Gold has an expected earnings growth rate of 2,225% for the current year. Its shares have appreciated 38.8% in the past year.
Yamana has a projected earnings growth rate of 76.9% for the ongoing year. The company’s shares have soared 91.8% over the past year.
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