Goldman Sachs Neutral On The World's 5th-Largest Copper Producer

Southern Copper Corp SCCO shares are currently trading at an 8 percent premium to their historical mid-cycle premium, which Goldman Sachs’ Humberto Meireles believes is justified, given the company’s premium leverage and growth profile.

Meireles initiated coverage of the company with a Neutral rating and price target of $27.

Growth

“After roughly a decade of flattish shipments, SCCO’s volume growth inflected in 2015 with the ramp-up of the Buenavista copper expansion in Mexico,” the analyst mentioned.

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Despite the lower copper prices, Meireles expects Southern Copper’s EBITDA to grow at a three-year CAGR of 10 percent, benefiting from the full impact of the Beunavista concentrator and additional project ramps in Peru.

The latter is expected to increase copper shipments to 1,045kt by 2019, from 737kt in 2015.

Balance Sheet

“SCCO’s leverage should remain controlled for the next three years despite growth investments as its high quality/low-cost output produces positive FCF on our Cu price deck,” Meireles stated.

In addition, the company has a strong balance sheet profile, with debt duration of approximately 21 years, implying no significant maturities until 2020 and the bulk of debt maturing only after 2035.

“At current levels, we estimate the stock is discounting a copper price of $4,600/ton from 2017 onwards, broadly in line with our copper price forecast of $4,500/ton,” the analyst added.