Southern Copper Is a Risky Bet You Should Avoid

Southern Copper [stock_market_widget type="inline" template="generic" color="default" assets="SCCO" markup="(NYSE: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] is having a mixed time on the stock market this year, and that’s not surprising given how the copper industry has unfolded in light of the trade war between the U.S. and China, as well as a global slowdown in economic growth. But the macroeconomic condition is not the only reason why Southern Copper is in a fix.

The company has been facing several challenges on the operational front that have added to the macro trouble it is facing. Let’s take a closer look.

What Ails Southern Copper?

A couple of months ago, the government of Peru suspended a construction permit that it had issued to Southern Copper for developing the Tia Maria mine. The future of the $1.4 billion project is in the doldrums as the local population has carried out violent protests against the mine.

Given that the mine is anticipated to deliver annual production of 120,000 tonnes of copper and Southern has been trying to develop it for the past decade, the latest suspension comes across as a major blow. It was only in July this year that Southern Copper had received the permit for going ahead with the construction of the mine, but decided that it won’t be starting construction until and unless the local population supports it.

There was a possibility that Southern was actually anticipating trouble at the mine and that turned out to be true as the latest incident suggests.

A Mixed Picture

There’s no denying that the incident in Peru has weighed on investor sentiment along with the global scenario. However, Southern Copper’s operational performance seems to be on point.

In the second quarter of 2019, the company’s copper production had increased 16.5% year over year to 256,352 tons. This was a result of a 68% increase in production at the Toquepala mine in Peru and an 11.4% spike in output from the Buenavista mine in Mexico.

But the nice bump in Southern Copper’s production was offset by weak pricing, as copper prices fell 11.2% year over year. As a result, net sales were down 1% year over year and net income fell 1.8%. The company had also sounded positive about the Tia Maria project, with board chairman German Larrea pointing out that:

We strongly believe this $1.4 billion project will further improve the Company’s asset base and profitability with an increase of 120,000 tons of annual copper production capacity at a very competitive cash cost. We think Tia Maria will also benefit Peru through multiple business and employment opportunities at a national, regional and local level, and with royalties and taxes. On top of this, with sales estimated at $750 million, Tia Maria will improve Per´s economy with a 0.4% increase in its GDP.

The company also pointed out that it plans to spend a total of $6.7 billion in Peru, including the development of other mines. But the current climate in Peru clearly indicates that investor confidence could take a hit on account of a roadblock to the company’s ambitions in that country.

Moreover, the copper price scenario might not turn around until the world economy picks up the pace, which is why it would be a good idea to maintain distance from Southern Copper.

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The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.

Harsh Singh Chauhan
Harsh Singh Chauhan has a wealth of experience evaluating publicly-traded companies across several verticals, including technology, oil and gas, retail, and consumer goods. His financial writing has been published across platforms such as The Motley Fool, TheStreet, and Seeking Alpha. Harsh's philosophy is to find great businesses for the long run based on company fundamentals and industry prospects. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.
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