Is This The Best Defensive Copper Play?

On Wednesday, J.P. Morgan issued a company note on Southern Copper Corp.

after a recent rise in stock price has made analysts believe that upside potential is limited. J.P. Morgan downgraded Southern Copper from Overweight to Neutral with a $28 price target. Rodolfo Angelo and Lucas Ferreira, analysts at J.P. Morgan, wrote, "We are downgrading SCCO to N from OW after the 12 percent run since January, which we believe limits the upside potential. In addition, diminishing balance sheet flexibility and a more conservative stance on growth, higher capex guidance and a stop to a hitherto very successful buy-back program may potentially cause some de-rating, on the margin, from premium valuation levels...We continue to prefer SCCO as a defensive copper play." J.P. Morgan highlighted a key point which could provide limited upside for the company's share price going forward. 1. Discontinuation of the share buyback program Analysts noted that Southern Copper had implemented a $3 billion buy-back program which has helped to lessen the volatility of the company's stock. However, according to management, the buyback program will not be implemented going forward as the company's focus will be on preserving cash. This is in response to a large capital expenditure program that will entail $5.6 billion of investment over the next 5 years. While this investment could provide opportunities for top line and margin growth in the future, the short term share price movement is uncertain. Currently, Southern Copper is trading at $25.46, down 3.56 percent.