Reasons to Stay Invested in Southern Copper
Southern Copper (SCCO) has put in a decent performance this year on the stock market as it has remained flat despite the weakness in the commodity market. However, the possibility that Southern Copper will face weakness in its financial performance going forward cannot be ruled out, though the company is taking smart steps to overcome end-market weakness.
Going forward, there are various issues that might trouble the company ranging from new projects and existing operations to scrap production that will affect its supply.
Consequently, it is estimated that the market will turn to deficit in 2015, which will ultimately drive the prices up. This is good news for the company since the current copper price levels are not sufficient to promote the necessary future supply growth. However, if prices rise it will improve the long-term fundamentals of the industry.
In addition, its cost reduction results are quite impressive. The main factors contributing to this cause includes lower energy, diesel and fuel costs, lower labor cost, low cost of contractors and explorations costs. Albeit this positive was offset by higher depreciation and other factors but it has showed a path and the company is walking in the right direction.
What about copper prices?
However, if we look at the pricing environment analysts are not very optimistic about the future rise in commodity prices. According to a Morningstar report, “Cheaper oil, weaker producer country currencies, and industry-specific deflation point to lower mining costs in 2015 and beyond. But with lower costs come lower prices. Cost mix and currency exposure differences mean larger cuts to our price forecasts for coal and iron ore than copper. For copper, our long-term price forecast falls a more modest 8%, from $2.67 per pound to $2.46.”
However, in the near term, management anticipates improving copper demand, especially in the U.S. and Western Europe. These higher expectations stem from export-oriented industries in Europe favored by the weak euro. On the other hand Chinese copper demand would be driven by automotive industry and expanding investments in the electric grid.
Southern Copper shares have held steady on the stock market in 2015, although the company will find it difficult to maintain this performance in the short run. However, keeping the long-term potential in mind, Southern Copper looks like a good investment.