Large companies that are trading near their 52-week lows are always worth taking a look at due to their growth potential and good point for entry. When the stock in question is Southern Copper Corporation (SCCO), one of the world’s largest producers of copper, even more so. With current share prices hovering around the $26 per share mark in December, and dropping to its 52-week low of $24.50 on Dec. 5, investors might be looking at a great value-investment opportunity. So let’s take a closer look at this stock and the reasons why an investment in the copper industry might be worthwhile.
One of Southern Copper’s main sources of revenue stems from emerging markets. In fact, around 65% of global copper consumption comes from Asia, with China accounting for 41% of worldwide demand. Hence, the firm will continue to focus its attention on the Popular Republic in years to come. As of late, however, the short-term decrease in demand has taken a toll on Southern Copper. Nevertheless, looking towards the long term, the construction sector is bound to regain momentum as urbanization is on the rise.
This might sound like speculation to some, yet economic variables concerning Chinese growth indicate a clear upwards trend. As the economy continues to grow, copper will become increasingly important. There have naturally been worries regarding China’s economic situation and future outlook, and in turn, Southern Copper has lost around 31% in share value over the past year. In other words, the stock offers a clear opportunity for optimistic value-investors looking to buy in cheap.
Low Cash Costs and Other Growth-Drivers
Apart from focusing on emerging markets, Southern Copper is also set to benefit from the recovering U.S. and European economies. As these markets regain momentum, demand for copper is bound to increase, leading to greater commodity prices and new opportunities for the company. Considering that copper supply is very limited, and fresh discoveries of reserves are the exception, an industry giant such as Southern Copper will surely benefit from an improving economic environment.
One of the firm’s most exciting features are its low cash costs. At a mere $1.30 per pound of copper, it is one of the lowest in the industry, far below that of rival Freeport-McMoRan Copper & Gold (FCX). Hence, in terms of competition, Southern Copper doesn’t have much to fear, as it operates with large margins and has a steady output. Free cash flow levels are indicative of the firm’s ability to operate with large margins, as is the 46.6% operating margin, which is 10.6 times higher than the industry average, and 14% higher than Freeport-McMoRan’s.
Further Expansion in Sight
As the company enters 2014, heavy investments in expansion projects are expected to peak, reaching the $2.3 billion mark. Since Southern Copper expects the improving economic environment to generate larger demand for copper, and higher prices, expanding production is seen as a wise strategic move. Should the economic situation prove to follow the expected path, share price is bound to increase significantly over the coming year.
For investors looking to make a smart value-investment, Southern Copper seems like a good choice, as it enables shareholders exposure to a key commodity. As a core element in construction, as well as in electronic products, demand for copper will continue to grow as long as the economic environment is improving.
Also, since the stock is trading at 13 times its trailing earnings, it is still very well valued, entailing only a small price premium of 4% relative to industry peers’ average. With EPS growth at 28.4% and ROIC at 51.8%, Southern Copper is definitely a stock to keep in mind. I personally feel very bullish regarding this copper producer, and thus can only agree with Ray Dalio’s recent 68.7% increase in shares of common stock.