Southern Copper (SCCO, Financial) is facing a soft copper market. However, the company is well-prepared for this situation as it had anticipated that copper prices will decline. To deal with weak pricing and to be profitable, Southern Copper is focusing on strengthening its long term prospects. Let's take a closer look at Southern's moves.
Why it can improve
In the near term as well, Southern Copper is seeing improvement in copper. The main reason behind this improvement is the recovering U.S economy which is leading to growth in the demand. These are some of the bright spots that Southern Copper is seeing for future growth. Further, the company is seeing good growth opportunities on the back of growth in demand in other European countries as well as in Japan and China. However, this is not as easy for Southern Copper as there are several structural factors such as scrap scarcity, delay in project start up, technical problems and other challenges that are expected to affect the supply.
Moving ahead, Southern Copper is also seeing good growth in from its Molybdenum production. The company has already seen a 27% growth in the molybdenum production in third quarter. This indicates that the demand for molybdenum is increasing and to support this growth Southern Copper is now increasing the guidance for molybdenum by 18% more than its production in 2013. In terms of production the company is increasing its guidance from 21,500 tons to 23,400 tons.
It is now engaged in ramping up the production of copper cathode. The company on the other hand is pleased with the in line operation of its solvent extraction trains. Following this, Southern has also initiated operation of the second half of it electro winning plant. Southern Copper is confident of getting better results in terms of production when this comes in its full form in upcoming days. Moreover, to support this initiative, the company is also investing meaningfully. It has already invested about $444 million up till now.
Looking forward, Southern Copper is expecting a lot from its Cuajone project. It is investing about $45 million on high pressure grinding rolls project. With this Southern will be able to produce finely crushed material. With this project, the company is expecting good cost savings, improvement in copper recovery and reduction in power consumption in the crushing process which will benefit the margins of the company.
Conclusion
Moving to the fundamentals, with a trailing P/E of 17.04 the stock looks reasonable and the forward P/E of 15.54 shows good earnings growth in the near term. But in the long term, the company’s earnings are disappointing it is growing at a CAGR of just 8.59% as compared to the industry average of 20.67%. All these facts show that long term prospects of the company looks weak so I would like to suggest the short term investors to definitely include Southern Copper in their portfolio and the investors seeking long term gains must stay away from the stock in long term.
