Southern Copper Corporation SCCO is poised well to grow on the back of expansion projects, benefits of cost-reduction programs and solid long-term outlook for metal prices. However, low copper production in fiscal 2018 and high leverage remain concerns.
Here we take a quick look at the primary factors plaguing Southern Copper at the moment and discuss the prospects that can aid near-term recovery.
What’s Deterring Southern Copper?
Lower Production: Lower production at the Buenavista SX-EW plant has limited the company’s overall copper production. This can be attributed to the lower solubility index in the new leach pads and characteristic of the ore being deposited in such pads.  The company has formulated 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 0.6% over the past year, against the industry’s decline of 17.3%.
The company continues to witness the benefits of cost-reduction programs and expansion actions. Southern Copper is is positioned well to deliver solid performances on the back of positive current market outlook, constant commitment to increasing low-cost production and growth investments.
New Projects Hold Promise: In June 2018, Southern Copper completed the acquisition of 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 has an initial mine life of more than 25 years. It offers immense growth opportunities for the company and fits into the company’s 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.
The Toquepala expansion project in Peru, once completed, is anticipated to add 100,000 tons to the company’s annual copper production capacity, with lower cash cost per pound of copper and 3,100 tons of molybdenum. 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 in the world 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 synchronized economic growth of major world economies, refined copper demand is anticipated 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 driven by 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 and safe haven demand in times of economic uncertainty.
Return on Assets (ROA): Southern Copper currently has a ROA of 7.1%, while the industry’s ROA is 6.3%. An above-average ROA denotes that the company is generating earnings by effectively managing assets.
Stocks to Consider
Investors interested in the basic materials sector might take a look at a few better-ranked stocks like, CF Industries Holdings, Inc. CF, Methanex Corporation MEOH and KMG Chemicals, Inc. KMG. While CF Industries and Methanex Corporation sport a Zacks Rank #1 (Strong Buy), KMG Chemicals carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
CF Industries has a long-term earnings growth rate of 6%. The stock has rallied around 43% in a year’s time.
Methanex has an expected long-term earnings growth rate of 15%. The company’s shares have rallied around 49% in a year.
KMG Chemicals has an expected long-term earnings growth rate of 33.2%. Its shares have gained roughly 43% over a year.
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