Lowered Miner Estimates Lead To Southern Copper Downgrade

August 31, 2015

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Southern Copper Corp (NYSE: SCCO) shares are down 8 percent in the last three months, even after picking up momentum last week and rising 6 percent.
JP Morgan’s Rodolfo Angele downgraded the rating on the company from Overweight to Neutral, while reducing the price target from $37.00 to 31.50.
The estimates for nickel and copper prices have been substantially reduced due to persistently weaker commodity demand.

The JP Morgan Commodity Strategy team has cut its 2016 estimates for nickel by 53 percent to $8,750/ton and for copper by 30 percent to $4,400/ton. “This below-consensus view is mainly predicated on a more negative view on persistently weaker commodity demand,” analyst Rodolfo Angele said, citing continued softness in China and absence of demand rebound in Western European and North American.

Moreover, the long-term iron ore pricing assumptions have been reduced from $75/t to $65/t. “We now assume lower capex intensity and opex in our incentive price methodology to determine long-term iron ore prices,” Angele added.

While saying that Southern Copper has growth potential, given its several brownfield and greenfield projects, Angele stated that investors could get exposure to “the same copper growth story at more reasonable prices” through its parent company, Grupo Mexico.

In the report JP Morgan noted, “Our Neutral rating on Southern Copper is mainly predicated on (a) rich valuations especially when compared to peers and (b) a more cautious view on pricing of its most important product, which is copper.”

The EBITDA estimates for 2015 and 2016 have been reduced by 13 percent, from $2,508M to $2,185M, and by 44 percent, from $3,237M to $1,810M, respectively, to reflect the changes in estimates for commodity prices.