Here's Why Southern Copper (SCCO) Stock Holds Potential

Southern (NYSE:SO) Copper Corporation (NYSE:SCCO) is poised to grow on the back of its copper reserves, expansion projects and benefits from cost-reduction programs. However, low metal prices due to the impact of coronavirus remains a near-term concern.

At present, Southern Copper carries a Zacks Rank #3 (Hold). It has a VGM Score of B. Our research shows that stocks with a VGM Score of A or B, when combined with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3, offer the best investment opportunities for investors.

Shares of the company have depreciated 1.2% in the past year compared with the industry’s decline of 7.3%.

Strong Q4 Results

Southern Copper reported fourth-quarter 2019 adjusted earnings of 40 cents per share, up 4% from prior-year quarter. Net sales came in at $1,855 million, reflecting an improvement of 9% year over year on higher sales volume of copper, silver and molybdenum, and rising silver prices. However, lower copper, molybdenum and zinc prices somewhat offset these gains.

Solid Production Numbers

In 2019, Southern Copper produced around $1.02 million tons of copper — a new milestone in the company’s history driven by higher copper production at the Toquepala mine and the Buenavista mine. Construction of the Toquepala concentrator expansion reached full capacity usage at the end of the June-end quarter. This expansion project has increased Toquepala´s annual copper production by 100,000 tons.

Molybdenum production reached 26,885 tons in 2019, reflecting an increase of 22.3% from 2018 and above the guidance of 25,500 tons. This was driven by higher production at all of the mines, particularly led by Toquepala mine as result of its new molybdenum plant that set off production in April 2019.

Mined silver production improved 17.1% in 2019 backed by the Toquepala, Buenavista and IMMSA operations. Mined zinc production increased 4.4% in 2019 due to higher production at Santa Barbara and San Martin mines. The company has resumed operations at its San Martin mine, which is expected to contribute to the company’s production.

Low Cost & Largest Reserves: A Winning Combination

The company continues to witness the benefits of cost-reduction programs and expansion actions. 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 commitment to increase low-cost production and growth investments, the company is well poised to continue delivering enhanced performance.

Solid Growth 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 anticipated to 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, which consists of 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 and other investments in Mexico will enhance the company’s Mexican operations’ copper production by 16% and zinc production by 93%. The company has number of other projects that it may develop in the future, which will help it achieve copper volume production target of 1.5 million tons by 2028.

Return on Assets (ROA)

Southern Copper currently has a ROA of 9.3%, while the industry's ROA is 1.9%. An above-average ROA denotes that the company is generating earnings by effectively managing assets.

Coronavirus Impact a Concern

The coronavirus outbreak has dealt a blow to copper prices. Concerns that it will impact industrial activity in China — the world's biggest metals consumer, led to a fresh plunge in copper prices. Now with the virus spreading to other parts of the world, concerns over its impact on the global economy is weighing on prices of copper, zinc and molybdenum. This will impact Southern Copper’s near-term results until the situation stabilizes.

Stocks to Consider

Some better-ranked stocks in the basic materials space are Daqo New Energy Corp (NYSE:DQ) , Sibanye Gold Limited (NYSE:SBSW) and Impala Platinum Holdings Limited (OTC:IMPUY) , each currently sporting a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Daqo New Energy has an expected long-term earnings growth rate of 29%. The company’s shares have appreciated 74% in the past year.

Sibanye has an expected long-term earnings growth rate of 20.4%. Its shares have returned 118% in the past year.

Impala Platinum has an expected long-term earnings growth rate of 26.5%. The company’s shares have soared 114% in the past year.

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