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Southern Copper (SCCO) Bets on Strong Projects Amid Cost Woes

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Southern Copper Corporation (SCCO - Free Report) is well-poised for growth, backed by its industry-leading copper reserves and ongoing investment in solid expansion projects. However, the current inflationary scenario remains a concern.

Upbeat Production Outlook for 2024

Southern Copper expects to produce 935,900 tons of copper in 2024, which projects a 2.7% year-over-year improvement. In 2023, the Pilares project operated at full capacity and the company also initiated a ramp-up at the Buenavista zinc concentrator. These two projects are expected to contribute 44,000 tons of copper to the total copper production.

Zinc output is expected to be 117,800 tons, which factors in a 79.8% surge year over year. This growth will be driven by the startup of the Buenavista zinc concentrator, which is expected to contribute 54,400 tons of zinc. The company expects to produce more than 170,000 tons of zinc from 2025 onward. Silver production is likely to be around 20.7 million ounces, 12.2% higher than 2022.

Inflated Costs to Hurt Margins

In 2023, operating cash cost per pound of copper, including byproduct revenue credits, was $1.03. The $0.25 increase in cash cost reported from the $0.78 per pound in 2022 was mainly attributable to a $0.17 per pound increase in production cost and a $0.08 reduction in byproduct revenue credits. For 2024, the company expects cash cost before byproduct credits at around $2.20 per pound.

SCCO has been witnessing higher labor costs due to the ongoing tightness of labor supply. This, along with ongoing inflation for repair materials, operating materials, inventory consumption, operation contractors and services, will continue to weigh on the company’s margins.

Solid Projects on Track

Southern Copper has the largest copper reserves and operates high-quality, world-class assets in investment-grade countries, such as Mexico and Peru. The company continues to invest to grow its portfolio and reserves.

The company’s capital investment program for this decade is more than $15 billion. This includes investments in the Buenavista Zinc, Pilares, El Pilar and El Arco projects in Mexico and the Tia Maria, Los Chancas and Michiquillay projects in Peru. This forecast also includes several infrastructure investments, including key investments to bolster the competitiveness of the El Arco project.

Southern Copper’s Michiquillay is expected to become one of Peru's largest copper mines and will produce 225,000 tons of copper per year (along with by-products of molybdenum, gold and silver) for an expected mine life of more than 25 years. Production is expected to start by 2032. The Los Chancas project is an open-pit mine with a combined operation of concentrator and SX-EW processes. It is expected to produce 130,000 tons of copper and 7,500 tons of molybdenum annually. The project is expected to commence operations in 2030.

In Mexico, the company invested $439 million in the Buenavista Zinc – Sonora project. It has built a new concentrator plant. This facility has an annual production capacity of 100,000 tons of zinc and 20,000 tons of copper. Ramping up of the plant began in the first quarter of 2024 after technical adjustments to the concentrator.

Southern Copper expects to produce 54,500 tons of zinc and 11,900 tons of copper in 2024 and an average of 90,200 tons of zinc and 20,700 of copper per year in the next five years. The Pilares – Sonora project in Mexico, which has a budget of $176 million (with $145 already invested), comprises an open pit mine operation with an annual production capacity of 35,000 tons of copper in concentrates. It is currently delivering copper minerals to the facilities of the Caridad operation. This project will significantly improve the overall mineral ore grade.

Metal Prices to Pick Up in the Long Term

Copper prices had been impacted earlier this year on weaker-than-expected data from China. However, there has been a recent spike in copper prices on reports that China is planning to reduce output. China’s top copper smelters have jointly agreed to cut down production at unprofitable plants due to raw material shortages. Silver prices have gained amid increasing prospects that major central banks will soon start cutting interest rates.

The long-term outlook for copper is positive, as copper demand is expected to grow driven by electric vehicles and renewable energy, and infrastructure investments. Molybdenum prices are set to increase on the back of healthy demand and reduced supply. Long-term fundamentals for zinc and silver remain strong due to their significant industrial consumption.

Price Performance

The company’s shares have gained 45% over the past year compared with the industry’s 27.4% growth.

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Zacks Rank & Stocks to Consider

Southern Copper currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks from the basic materials space are Ecolab Inc. (ECL - Free Report) , Carpenter Technology Corporation (CRS - Free Report) and Hawkins, Inc. (HWKN - Free Report) . ECL and CRS sport a Zacks Rank #1 (Strong Buy) at present, and HWKN has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Ecolab’s 2024 earnings is pegged at $6.39 per share, indicating an increase of 22.7% from the prior year’s reported number. It has an average trailing four-quarter earnings surprise of 1.7%. ECL shares have gained 45% in a year.

The Zacks Consensus Estimate for Carpenter Technology’s 2024 earnings is pegged at $4.00 per share. The consensus estimate for 2024 earnings has moved 1% north in the past 60 days. It has an average trailing four-quarter earnings surprise of 14.3%. CRS shares have gained 64% in a year.

The Zacks Consensus Estimate for Hawkins’ fiscal 2024 earnings is pegged at $3.61 per share, indicating a year-over-year rise of 26.2%. The Zacks Consensus Estimate for HWKN’s current-year earnings has been revised 4.3% north in the past 60 days. It has an average trailing four-quarter earnings surprise of 30.6%. The company’s shares have rallied 84% in the past year.

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