24-7 Wall Street Insights

• On May 7, 2021, Southern Copper Corp. (NYSE: SCCO) enacted a 10-for-1 forward stock split, resulting in a post-split adjusted price of $115 per share. 
• While  remaining bullish on the copper industry, several analysts, such as Goldman Sachs, Morgan Stanley, and Scotiabank, have turned bearish on Southern Copper Corp.
• The average consensus 12-month target price among the bears is $63, with Scotiabank targeting as low as $52.36. Based on the $108 share price at the time of this writing, that would equal a 52% drop. 
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Phoenix, AZ headquartered Southern Copper Corp is a subsidiary of Americas Mining Corporation, whose parent company is Grupo Mexico. It is a major player in the Central and South American mining industry. Southern Copper Corp. is one of the top copper ore mining suppliers, with additional production of molybdenum, silver, zinc, gold, and lead. Investing News Network rates Southern Copper as the #9 largest copper production company on a global basis. 24/7 Wall Street has covered Southern Copper Corp. a number of times in past articles. 

From Bullish to Bearish

Between May 2022 and May 2024, Southern Copper Corp. went on a run from $550 per share to $1,118. A 10-for-1 forward split was enacted on May 7, and is a generally accepted bullish indicator. The gains leading to the stock-split announcement were in expectation of stronger revenues and earnings. This was due to a revival of copper prices from AI demand and resumption of Chinese infrastructure projects. 

At the end of April, Southern Copper Corp. announced Q1 2024 financials. While earnings and revenues beat estimates by roughly 17 cents per share, softer global market prices resulted in  overall revenue declines. This was despite production year over year increases of 8% in copper, 9.5% in molybdenum, 8% in silver, and a whopping 75% in zinc. 

The latest earnings report culminated in post-split market support from individual investors. However, a number of analysts, most notably Scotiabank, Morgan Stanley, HSBC and Goldman Sachs, either reconfirmed negative listings or downgraded their ratings on Southern Copper Corp. 

Bearish Rationales

While Morgan Stanley had previously cut its rating on Southern Copper Corp due to higher cash costs and nebulous production guidance, Goldman Sachs had a recent “sell” rating and referenced the following risks:

• Chilean copper production can potentially be a big contributor to Southern Copper Corp.’s overall production. The current political environment is perceived to be unstable re. mining and labor relations. Project cancellation or labor strikes causing delays and increased costs can severely impact the company.
• Based on current forecasts, Goldman’s projected annual revenue for Southern Copper is $9.768 billion, a decrease of 3.08%.
• Goldman Sachs also foresees an overall metal supply shortage going into later 2024. “We continue to forecast a shift into open-ended and mounting metal deficits from 2024 onwards,” the bank’s analysts, including Nicholas Snowdon, wrote in a note. There’s potential for a “stockout episode” — in which inventories run extremely low — by the fourth quarter.” Goldman believes Southern Copper Corp. will also be impacted.

Separately, Scotiabank’s Alfonso Salazar is the most bearish analyst covering Southern Copper Corp. His $52.36 price target is based on a perception that despite increased gross production, there are weaknesses in current financials that will be exploited further. Salazar asserts that the company will face difficulties keeping control of operational costs.

Cautiously Siding With the Bear

Southern Copper Corp. for better or worse, is a one-trick pony. In this case, it is mining. While the demand for copper, zinc, molybdenum, gold and silver remains strong and increasing, the extraction of and market for these metals is a complex subject. There are added risks that Southern Copper Corp. may face, that were perhaps not specified in detail from the aforementioned bears.  

• The commodity price swings and commensurate feast-or-famine revenues displayed in the past by Southern Copper Corp. reflect a stronger need for the deployment of hedging strategies. Lacking a strong futures trading desk will continue to make market risk exposure a significant factor that can affect Southern Copper Corp. revenues and earnings.
• Unlike with other industrial sectors, mining contains not only labor hazards, political risks and equipment variables, but also environmental and geological ones. Many of these cannot be prepared for or predicted in their entirety. As such, an inadvertent explosion, a flood, a labor strike, a government policy change, a publicity-seeking activist group on social media, or an earthquake are just some of the potential problems for Southern Copper Corp. The Buenavista del Cobre mine water supply issue, which delayed production in Mexico, is just one example. 
• Although Southern Copper Corp. has exploration development concessions in Chile, Argentina and Ecuador, all of the company’s production focus is in Mexico and Peru. While the reserves in Mexico and Peru appear to be very deep, alternative metal ore sources are both strategic and environmental risk management resources that appear to be getting short shrift.
• Newly elected Mexican President Claudia Sheinbaum is a former climate scientist and is expected to be hostile towards the mining industry. As such, there is a possibility for additional regulations in the future.  These would be on top of current Mexican bans of open-pit mines instituted by President Andrés Manuel López Obrador.

While copper demand is increasing, thanks to growing use with AI and in green energy initiatives, Southern Copper Corp. also reported an equivalent 8% increase of its silver production along with copper. As solar panels are the latest heavy use product of silver, along with LED tv monitor screens, smart phones, and electronic, jewelry, battery, and other manufacturing, silver is depleting much faster than copper. It would be ironic if the anticipated jump in silver market prices wind up making it more important to Southern Copper Corp. in the future.

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