The stock market has been severely battered this year with the Nasdaq dealing in the bear territory and S&P 500 just above it. Numerous headwinds including the Russia-Ukraine conflict, global supply chain disruptions, rising inflation, soaring interest rates, re-emergence of Covid-19, and lockdowns are collectively responsible for the equities downfall. The macroeconomic and geopolitical conditions are deteriorating fast. Amid such steep declines, usually, stocks in certain sectors crucial to economies are deemed defensive as they outperform the wider downfalls. Among the defensive sectors also come basic materials. However, added woes to copper stocks in the basic materials sector recently have been due to protests in Peru (the second-largest copper producer in the world). The Peru mining protests are even anticipated to clog a roughly $53 billion mining investment pipeline and halt future projects. The protest and resulting lockdowns have led many miners in the area to lose a good chunk of their revenues in the quarter. Impacted by this was also the mining company Southern Copper Corp. (SCCO).
Southern Copper Corp. (SCCO)
Currently trading at a price of $63.00 per share as per the premarket on May 31, SCCO has declined by 9.55% in the past three months. The company mines, explores, smelts, and refines copper as well as other minerals in Peru, Mexico, Argentina, and Chile. Based in Arizona, the AMC subsidiary is one of the leading copper miners in the world.
Let’s have a look at the company and its market situation:
SCCO’s Recent Woes
The company has been dealing with too many problems lately. The social and political upheaval in Peru largely impacted its Q1 performance. This comes at a time when SCCO was already up against lower ore grades and recoveries at other mines. The copper miner heavily relies on its production in Peru, where protests against the country’s mighty copper industry halted production for almost two months. Impoverished communities in the country have been staging growing protests against mining companies as they demand their share. While the protests were resolved after a 54-day disruption in the mines, protester talks still loom overhead.
Impact on Quarterly Financials
The upheaval in Peru led to a decline of 13.4% in SCCO’s quarterly sales. However, an increase of 18% in copper prices in the quarter contributed to a rise of 9.1% YOY in its total revenue. Thus, the quarterly revenue was $2.76 billion which surpassed the expected $2.68 billion. Earnings per share were $1.02 for the quarter which rose by 3% YOY but missed the consensus estimate by $0.06.
Comparatively, for the prior quarter, the company had posted a 20% increase in revenue and a 37% rise in earnings.
The Copper Market
New cars particularly EVs on top of copper’s use in real estate have boomed the demand for the metal lately. Another contributing factor to the rising demand for copper has been the global supply chain disruptions due to a) Russia and Ukraine conflict and b) the more recent Peru protests and strikes. Over the years, the demand is expected to soar high and supply to fall short due to declining resources.
According to Bloomberg, Goldman Sachs metals strategist Nick Snowdon even predicted copper as the new oil in the next decade. A supply crunch in copper could send the red metal’s prices sky-high. The increase in demand for the metal is expected to be supported by the rising adoption of renewable energy, electricity infrastructure, and electric vehicles alongside global carbon reduction targets. This paradigm shift, the analysts said, could send copper to new highs with even US$15,000/t proving conservative. While the higher prices will likely contribute to large revenues for miners, short supply would prove a harsh headwind.
Conclusion
The overall condition in the copper market looks concerning as demand is expected to soar and supply constricted. While one plus exists from the price front, keeping up with the rising demand amid declining and deteriorating supplies would be challenging. SCCO’s management, however, is bullish on the company’s outlook with a YOY increase of 8.1% in revenue for 2023. Moreover, with a dividend yield of 8.5%, the stock might seem quite appealing but its 12-month median price forecast is at $62. Hence, it seems a better option to avoid the stock for now but if one is interested only in dividends then sure it’s a good buy.
