Tags: SCCO | FCX | copper | metals

Southern Copper Braces for Royalty Decision

By    |   Wednesday, 21 Sep 2011 12:31 PM

Uncertainty surrounding a proposal by Peru’s President Ollanta Humala to increase the mining royalty is weighing on shares of Southern Copper Corporation (SCCO), one of the world's top producers of the metal. Nevertheless, the company is ramping up production as global copper demand continues to outpace supply.

The European debt crisis and U.S. macroeconomic uncertainty has dented the metal’s price (it’s widely used in manufacturing and construction), but Southern Copper, a unit of Grupo Mexico (GMEXICOB.MX), sees a global recovery stabilizing prices.

“For the rest of 2011, we believe that market fundamentals for copper will improve as we expect to have higher Asian demand coming from Japan and China,” said CFO Raul Jacob in a recent conference call.

Southern Copper is on track to reach its goal of increasing copper production 30 percent to 600,000 tonnes this year after miners went back to work at the firm’s Buenavista mine in Mexico following a three-year strike. The company is based in Arizona and has operations in Peru and Mexico.

Production at Buenavista boosted the company’s copper production 28.8 percent to 146,241 tons in the second quarter year-on-year. As a result of this and high prices, Southern Copper’s profits more than doubled to $658 million, up from $313.4 million in the same period a year earlier.

Southern Copper is the world’s second-largest producer of molybdenum after Freeport-McMoRan Copper & Gold Inc. (FCX). It plans to build a new plant in Mexico next year, but the company remains focused on its copper business, which represents 77 percent of sales.

The company plans to invest $5.6 billion to expand operations in the next five years, including its $1.3 billion Los Chancas project in Peru. The firm also is preparing to resume talks with the government over its proposed $1 billion Tia Maria mine, which could yield 120,000 tonnes of copper annually, said CEO Oscar Gonzalez.

But Gonzalez is waiting to see how these projects could be affected by Peru’s new tax regime. Humala, who was elected in June on pledges to raise mining taxes to help fight poverty, presented a bill to Congress in mid-September to increase the royalty.

The proposal was negotiated with mining companies, which has helped soothe investor concerns, but some industry sources say the higher tax burden could threaten smaller operations.

A potential bargain

Southern Copper’s ADR has fallen to near its 52-week low in recent weeks, but it could be a bargain at this price. Most analysts target between $41.50 and $49.

Earlier this month, UBS upgraded Southern Copper to neutral from sell, citing its improved valuation. Barclay’s Capital has upgraded it to equal weight from underweight.

"Specific policy proposals from the new Peruvian government wouldn't affect its mining operations," Standard & Poor's analyst Bernardo Gonzalez wrote in a July report. "The probability of a sharp policy shift to economic populism in Peru is low."

Gonzalez affirmed a BBB- corporate credit rating on Grupo Mexico and its subsidiaries and revised the outlook to positive from stable.

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Uncertainty surrounding a proposal by Peru s President Ollanta Humala to increase the mining royalty is weighing on shares of Southern Copper Corporation (SCCO), one of the world's top producers of the metal. Nevertheless, the company is ramping up production as global...
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2011-31-21
Wednesday, 21 Sep 2011 12:31 PM
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