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Why Analysts See a Downside in Southern Copper

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Downside

Southern Copper (SCCO) received a mean price target of $37.03 from 11 analysts polled by Thomson Reuters on September 22. Based on that day’s closing prices, this represents a 5.3% downside.

Overall, Southern Copper received a “buy” or equivalent rating from only two analysts. Four analysts rated the stock as a “hold,” and another four analysts rated the stock as a “sell.” One analyst had a “strong sell” rating on Southern Copper.

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Pure-play copper producer

Southern Copper is a pure-play copper producer unlike Glencore (GLNCY), which is a diversified miner. The company expects to produce 1.5 million metric tons of copper in 2023, which would be 67% higher than what it’s expected to produce this year.

Along with the ongoing expansion projects, the company is also seeking new growth initiatives. According to Reuters, Southern Copper is looking to bid for the Michiquillay project in Peru (ECH).

Along with a rising production profile, Southern Copper also has lower unit production costs. The company reported after-byproduct unit cash costs of $0.98 per pound in 2Q17. The metric stood at $1.20 for Freeport-McMoRan (FCX) and Antofagasta. Teck Resources (TECK) reported unit production costs of $1.26 per pound in 2Q17.

Valuation

While Southern Copper’s business outlook looks positive considering copper’s long-term fundamentals, Wall Street could be apprehensive about the company’s higher valuation multiples. The stock is trading at an EV-to-EBITDA[1. enterprise value to earnings before interest, tax, depreciation, and amortization] multiple of ~11.9x based on its 2017 expected earnings and ~10.6x based on its 2018 consensus earnings.

Markets could also be concerned over Southern Copper’s financial leverage at a time when it is aggressively investing in growth projects. 

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