A swath of analyst downgrades and worries about whether mining giant Southern Copper’s (NYSE:SCCO) lofty dividend is sustainable conspired to send shares down 4.5% on above-average volume Tuesday.
The big question for investors: Is this a case of single-company headwinds or a shot across the copper sector’s bow?
SCCO is one of the largest global copper mining companies in a market that includes BHP Billiton (NYSE:BHP), Rio Tinto (NYSE:RIO), Vale (NYSE:VALE) and Freeport-McMoRan Copper & Gold (NYSE:FCX).
In the past week, the stock has received downgrades from analysts at Morgan Stanley, JP Morgan Chase, BB&T and Citigroup amid a couple pieces of disconcerting news.
Last week, some 2,500 workers at SCCO’s mining operations in Peru announced plans to go on strike if the company and union negotiators can’t reach a new labor deal within 15 days. Also, Southern Copper’s announcement of a 24-cent dividend had analysts worried about the sustainability of its payout. That payout translates into a 2.4% yield — a far cry from the high-octane 9.5% yield based on its past four payments.
Still, SCCO shares have gained more than 40% over the past year, largely due to strong demand for copper and rising prices.
The degree to which those trends continue throughout 2013 will determine not only the outlook for Southern Copper and its peers, but for the broader global economy. Trends in copper prices and supply are a pretty big deal because the red metal is so heavily used in manufacturing and construction that rising or falling demand often directly correlates with ups and downs in the global economy. That’s how it got the nickname “Dr. Copper.”
Unfortunately, recent copper forecasts have delivered mixed messages.
On the one hand, HSBC said this week that a tighter market would drive copper prices to $8,000 a ton in 2013, up from last year’s $7,500 a ton average. Copper futures also rose this week, buoyed by new signs of manufacturing strength in China and construction in the U.S. The latest Reuters poll of base metals analysts revealed that while the growth prospects of China, the largest global consumer of metals, look good for the year.
However, no one believes copper will return to the glory days of $10,000 per ton in the near-term, and the report tagged Dr. Copper as the “unlikely laggard” in this year’s poll. Combined with a forecast for record copper output in Chile, the world’s largest producer, those trends could limit upside for copper stocks like SCCO over the next three to six months.
What to Do
Investors can take a few things from SCCO’s plight and the glut of recent mixed outlooks on copper:
- Bad News Begets Bargains. SCCO still is a solid stock with long-term upside that has performed well for investors recently, as InvestorPlace’s Marc Bastow points out here. It also looks pretty overvalued compared to competitors. However, if the company manages to head off a strike in February, it will add significant costs to do so, squeezing profits. Earnings will take a bigger hit if workers do walk out and production stalls. That could present an opportunity for investors to pick up a bargain next month … though that dividend remains a wild-card worry.
- RIO Could Be a Buy Now. Rival Rio Tinto closed the chapter this month on a five-year shopping spree that resulted in a $14 billion charge and the exit of CEO Tom Albanese. That means RIO might be worth a look now. New CEO Sam Walsh has Street cred, having headed the company’s revenue-driving iron ore business since 2004. The stock is undervalued compared to its peers, plans to reverse the nearly 25% growth in annual spending, and plans to boost production in copper, iron ore and petroleum by 10%.
- Diversify in Copper With an ETF. The longer-term picture for copper looks good. So if you’re looking for exposure to copper mining stocks, but don’t want to put all your eggs in one basket, try an exchange-traded fund. Unlike funds that focus on futures contracts or physical copper, the Global X Copper Miners ETF (NYSE:COPX) tracks the Solactive Global Copper Miners Index, which includes companies like SCCO, Grupo Mexico (PINK:GMBXF), Inmet Mining and Xstrata. The fund hasn’t attracted a ton of assets, with just $33 million under management, but it does offer a healthy 3.3% dividend yield and charges 0.65% in expenses. But given the short-term headwinds, you might want to hold off for a few months and re-evaluate the field before buying in.
As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.