Producers of copper, iron ore, steel and aluminum are trading higher following pledges from China's top steelmaking province to further cut production capacity.
Shanghai steel futures jumped 7% overnight to their highest in nearly three weeks, with iron ore and coking coal climbing ~8%, on reports that Hebei province, which accounts for 25% of China's total steel output, plans to more than double this year's cut to 31.86M metric tons of steel and ironmaking capacity this year.
Also, London copper rose 3% to $5,755/metric tons, extending YTD gains to nearly 5%, on news that China’s producer prices had surged in December.
Southern Copper (SCCO -0.3%) edges lower after reporting Q3 earnings of $0.26/share, missing analyst consensus by $0.04, on $1.4B in revenues, 23% higher than the year-ago quarter and in line with estimates.
Q3 copper mine production rose 25% Y/Y to nearly 225K tons, mainly the result of a 73% surge in production at the Buenavista mine in Sonora, Mexico.
SCCO, with mining operations in Mexico and Peru, says it expects to produce a total of ~905K tons in FY 2016.
Southern Copper (SCCO -0.4%) is slightly lower after reporting Q2 earnings of $0.29/share, $0.02 above the $0.27 analyst consensus estimate, on revenues of $1.34B, in-line with $1.33B consensus.
SCCO says its Q2 copper mine production rose 26% Y/Y to 225.8K metric tons from 179.1K tons in the year-ago quarter, mostly the result of a 78% increase in production at the Buenavista mine in Mexico, which increased production by more than 49K tons.
SCCO says the result pushed H1 production to a record of 447.5K metric tons, and now expects 913.5K tons for the full year.
Gold prices likely will rise in the near to medium term as the market turns to "safe mode,” but a market surplus is expected to drive copper prices lower over the next year or two, Credit Suisse says, also downgrading Southern Copper (SCCO -1.9%) to Underperform from Neutral with a $20 price target, cut from $28.
Copper prices likely will slip below $2/lb and reach a trough of $1.80/lb by 2018, and will hurt SCCO’s stock valuation, the firm says, even while reaffirming a positive view of the fundamentals behind the stock's investment case.
Credit Suisse foresees strong copper production at SCCO, with a 5% compound annual growth rate during 2016-21, with the Buenavista expansion expected to be completed by 2017 and Tia Maria ramped up by 2021.
Losing SCCO would have left Peru without enough stocks that meet the liquidity criteria of MSCI’s emerging market category, likely triggering its reclassification as a frontier market and billions of dollars of outflows.
SCCO was incorporated in Delaware and is headquartered in Phoenix, Ariz., but its revenue comes from mine operations in Peru and Mexico.
Southern Copper (SCCO -3.8%) is downgraded to Neutral from Overweight with a $28 price target at J.P. Morgan, citing the 12% run-up since January which the firm believes limits upside potential.
While JPM says it continues to like SCCO as a defensive copper play, it points to diminishing balance sheet flexibility, a more conservative stance on growth, higher capex guidance and the end of the successful buyback program as limiting share price gains from premium valuation levels.
SCCO is curtailing the buyback program as the company's focus will be on preserving cash in response to a $5.6B capex program over the next five years, which JPM says could provide opportunities for top line and margin growth in the future but cause short-term share price uncertainty.
Copper prices hit a six-year low for the fifth time in a week in London, -1.9%, amid worries about China’s economy, and are now down nearly 9% YTD; aluminum, lead, nickel and zinc all fell more than 1%.
Long-dated “copper prices adjusted for producer country FX are mostly unchanged, which underscores the macro nature of the recent declines,” according to Goldman Sachs.
"No lasting price recovery appears possible at present, neither on the metal markets nor on the commodities markets in general," Commerzbank says.
Peru's energy and mines minister says the country's copper output should jump 65% in 2016 to ~2.5M metric tons after the massive Las Bambas project starts operations in February.
Ongoing talks in communities where protests against Las Bambas turned deadly in September have been positive recently and have not held up the $7.4B project; the mine should produce 250K-300K metric tons of copper in 2016.
But still-strong local opposition to Southern Copper's (SCCO -1.7%) $1.4B Tia Maria project likely prevent the government from issuing a construction permit for the stalled project, the minister says.
Southern Copper (SCCO -1.3%) says its Q3 net profit fell 70% Y/Y to $98.4M, well below the $170M analyst consensus estimate, amid weak copper prices.
SCCO says lower copper prices were somewhat offset by an 8.8% Y/Y rise in copper production to 536.6K metric tons in the first nine months of 2015, mainly as a result of the production performance of the Buenavista mine which increased production by the additional production of a new state of the art plant.
SCCO says it expects to increase production capacity to 1.165M metric tons of copper by 2018.
Southern Copper (NYSE:SCCO) CEO Oscar Gonzalez says opposition to the Tia Maria copper project in southern Peru is easing because of its door-to-door campaign in communities where activists halted the project with protests earlier this year.
SCCO put Tia Maria on hold in May after rallies against it turned violent, but the company has since ramped up efforts to dispel fears the project would pollute surrounding agricultural valleys.
The CEO says he still hopes to get the $1.4B project back on track this year.
Companies with exposure to the zinc and met coal markets look appealing, FBR says, as supply reductions could act as a positive catalyst for prices; Teck Resources (NYSE:TCK) is the firm's top pick there, with Horsehead Holding (NASDAQ:ZINC) the favorite small-cap idea.
The firm sees "no structural turnaround for domestic thermal coal," but thinks the rate of decline will begin to slow next year, justifying Outperform ratings on Alliance Resource Partners (NASDAQ:ARLP) and Westmoreland Coal (NASDAQ:WLB); Cloud Peak Energy (NYSE:CLD) and Joy Global (NYSE:JOY) are rated Underperform.
FBR is fairly upbeat on steel names, initiating SunCoke Energy (NYSE:SXC) and SunCoke Partners (NYSE:SXCP) at Outperform, as SunCoke’s long-lived coke assets are able to generate strong margins “in almost any U.S. steel environment"; Cliffs Natural Resources (NYSE:CLF) is rated Market Perform.
The copper market will remain in surplus through 2017, FBR says, but it rates Southern Copper (NYSE:SCCO) at Outperform; Freeport McMoRan (NYSE:FCX) is rated Market Perform.
Among precious metals miners, the firm prefers Pan American Silver (NASDAQ:PAAS) and Royal Gold (NASDAQ:RGLD), the latter "a diversified company with a solid balance sheet and attractive acquisition opportunities."
Southern Copper (SCCO -2.2%) is downgraded to Neutral from Overweight with a $31.50 price target, cut from $37, at J.P. Morgan, which cuts its 2016 estimates for nickel by 53% to $8,750/ton and for copper by 30% to $4,400/ton because of persistently weaker commodity demand.
While SCCO has growth potential, given its several brownfield and greenfield projects, the firm thinks investors could get exposure to the same copper growth story at more reasonable prices through its parent company, Grupo Mexico (OTCPK:GMBXF).