By Mihir Gupta (UCL), Ameya Joshi (UCL), Sukrith Kumar (UCL) and Filippo Palacino (ETH Zurich)
Stock Name: Southern Copper Corporation
Sector: Diversified Metals & Mining
CMP: $55.13 (as on 09-11-2020)
Recommendation: Buy/ Hold
Target: $55.5 - $56.5
Duration: 2-2.5 weeks
Southern Copper Corporation (SCC) is among one of the largest integrated copper producers in the world. They predominantly produce copper, molybdenum, zinc, lead, coal, and silver.
All of their refining facilities are located in Peru and Mexico and they conduct exploration activities in both of those countries. Additionally, they also have ongoing exploration activities going on in Chile.
As per the official statements published by the company, the corporation’s net sales for Q3 FY 2020-21 were $2,129.1 million, which is a 14.5% increase as compared to the previous financial years’ result. The biggest sales were witnessed in case of molybdenum (+10.7%), zinc (+7.0%), and copper (+2.0%)
Among some of the other key financial statistics were an increase in net income by 29.9% for the quarter, as compared to the previous financial years’ figure. Furthermore, on a QoQ basis, a net income increase of approximately 95.0% was recorded. Their cash flow from operating activities stood at $1,688.0 million that is an increase of 23.2% over the $1,370.5 million.
Southern Copper Corporation's product offerings are essentially divided into five main segments which are essentially based on their core metal offerings. These five segments are Copper, Molybdenum, Zinc, Silver & Cold, and Other Products:
Copper: Their copper offerings included Copper concentrates, Anodic and Blister Copper, Refined Copper Cathodes, and Copper Wire. Most of their copper offerings have direct industrial or manufacturing applications.
Molybdenum: The main offering under this segment are the Molybdenum Concentrates. This product essentially has direct applications in the steel, lubricants, and other car parts.
Zinc: Their zinc offerings usually consist of Refined Zinc and Zinc Concentrates. These are directly used within the chemical and medical industries.
Silver and Gold: Both of these are produced at their precious metals plants and supplied to a range of industries such as coin minting, jewellery, photography, etc.
Other Products: Other products produced by SCCO include the following: Arsenic Trioxide, Lead Concentrates, Lime, Refined Cadmium, Sulphuric Acid and Coal.
Sector and Industry Overview
We would like to start our analysis by getting an overview of what is happening around the security, namely seeing in which direction the general market, its sector and its industry are trending compared to Southern Copper Corporation. We aim to check if the movements of the stock we are analyzing are backed up by some common sentiment around it or if they are just outlying events: in the latter case, the stock would be much more susceptible to unpredictable events and overall weaker. We believe that, ultimately, a stock has more trending power if moving in the same direction of its competitors.
Let’s start from the most general perspective: we analyze the index on which Southern Copper Corporation is listed, namely the NYSE Composite, which we believe to be a perfect benchmark for representing the general market conditions.
Graph 1: NYSE Composite chart with recent support and resistance levels (Investing.com as on 09/11/2020)
At first glance, what we can derive from the upper graph is that from April until these days the index moved following a logarithmic pattern. After a steady rise that lasted a few months, the index slowed down and later entered a consolidation period from the beginning of September until the beginning of November. This period was characterized by the formation of a clear support level and a clear resistance level - at 12250.00 and 13350.00 respectively. The resistance level was broken in a very unusual way by the last candle we can see appearing on the chart. A long red candle appeared after a very significant gap from the closing price of last Friday. The ideas on the situation are very confused; they mainly reflect the massive political events that occurred during the weekends and this short term significant jump was definitely a reaction to them that shouldn’t be taken too much into consideration, at least for the time being.
Now, although the market is in an uncertain period, led by short term irrational and difficult to predict movements and looking for a confirmation of some kind in the next future, it would still be interesting to see which are the players responsible for pushing the price higher and which ones for pushing the price lower. In particular, we would like to see which ones were performing very well not just recently, but also when the movement hadn’t reached a resistance level yet. We aim to identify winning sectors and losing sectors in the medium-short term by examining their performance in the last six months, three months and one month. Let’s have a look at the following statistics:
Graph 2: S&P 500 Sectoral movements for last month (Barchart.com as on 09/11/2020)
Graph 3: S&P 500 Sectoral movements for the past 3 months (Barchart.com as on 09/11/2020)
Graph 4: S&P 500 Sectoral movements for the past 6 months (Barchart.com as on 09/11/2020)
We can conclude that the recovery post market crash due to the outburst of the COVID-19 pandemic was led by a couple of sectors, while being slowed down by some others. Particularly, it is possible to see that the Materials sector was one of the top performers with a +7.11% return in the last month, +15.40% in the last three months and +35.55% in the last six months. These results are great and put the sector either at the very top of the sectors’ ranking for the timeframes analyzed or very near it. This is a good piece of information for us since SCCO is part of the Materials sector. In fact, specializing in metal processing, the company is clearly part of the Metals and Mining industry, which is part of the Materials sector. In order to have a more detailed understanding of how the sector is doing, we can examine the S&P 500 Materials index.
Graph 5: S&P 500 Materials chart with recent support and resistance levels (Investing.com as on 09/11/2020)
In the months following the Corona outbreak crash of March, the Materials sector recovered and achieved great returns, as the numbers in the previous sector performance’s statistics showed. Until the beginning of September, it had a steady uptrend, backed by a significant level of volume. After that, the index entered a horizontal movement, very similar to the one we observed for the NYSE Composite, which was characterized by a support level and a resistance level, both highlighted in the upper figure. Very interesting are the last movements. Differently from the general market, we don’t see any gap following the major political events of the weekend, but instead, the price had a good bullish push on Friday and didn’t move a lot at the reopening session of the next week. Now, two out of three parts of the candlestick pattern “Evening Star” were formed, but we still need the conclusion of it, as well as other confirmation of a possible future short-term downtrend. However, still noticeable is the fact that the movement of this sector wasn’t too irrational or unexpected when compared to the broad market, meaning that any next short term movement could be considered valuable and therefore be taken into consideration.
In the case of an index that achieved that valuable returns in the last periods and that, after a consolidation period of a few months, might get back on the upward track, we believe that it is definitely worth having a look at it in the following weeks. As for now, we want to see if there are industries that are winners inside the winners, that is industries that are achieving greater results compared to other ones in the same winning sector.
Graph 6: Sector and Industry Performance for Metals, Mining and Materials - 1 Year (Eresearch.fidelity as on 9/11/2020)
Graph 7: Sector and Industry Performance for Metals, Mining and Materials - 3 Months (Eresearch.fidelity as on 9/11/2020)
As we can see from Graphs 6 and 7, the Metals and Mining industry has clearly been the key driver of the Materials sector and has grown by 57% over the past year. Its growth rate has beaten the overall Materials sector and the S&P 500 (which has been used as a representative for the overall US markets) by a substantial margin. Much of this growth can be attributed to the current deficit in the copper markets, which is a result of the global demand from copper outstripping supply. Output of copper has decreased by 2.1% as a result of the disruptions to supply chains caused by COVID-19 but is set to increase by 4.3% year on year in 2021.
In the short term, Graph 7 shows that growth rate seems to be sticking to the 30% mark, but is likely to increase in the medium-long term as output from refineries increase.
It is also important to consider the growth of SCCO compared to its competitors as they are likely to follow the same industry trends, barring exogenous factors. We have chosen to compare SCCO to Freeport-McMoran, which is a leading natural resources company.
Graph 8: Market Capitalization Comparison to Freeport-McMoran (Craft.co as on 9/11/2020)
Graph 9: Technical Analysis of Freeport-McMoran (Investing.com as on 10-11-2020)
As can be seen in Graph 8 the market capitalisation of SCCO and Freeport-McMoran has followed exactly the same trends since January 2018, although SCCO has an overall higher market capitalisation. This makes Freeport-McMoran a good company to compare SCCO to.
Graph 9 shows a strong bullish rally in Freeport-McMoran’s stock price, it has been in a bullish trend since March (when markets crashed because of the pandemic). We have used the 12 and 26 Exponential Moving Averages to track the overall trend of the stock. The stock witnessed a golden crossover in mid-April and has been in a bullish trend since. The price action shows that whenever the 12-day EMA extends away from the 26-day EMA, the stock will witness some selling pressure to bring the lines closer together. This can be seen at the beginning of September, mid-September, and mid-October. As the 12-day EMA has again deviated from the 26-day EMA it is reasonable to expect we may see some selling pressure, but the overall trend appears to be bullish going forward.
Graph 10: 20-day Forecast Analysis for SCCO(R-Studio)
We used the statistical programming interface RStudio to algorithmically forecast the directional movement of SCCO’s stock price. Our customised model indicates some buying pressure soon (the x-axis represents time in days, while the y-axis represents stock price). However, the 20-day projection does allow for some room for the stock to see some selling, as indicated by the 95% and 80% confidence intervals (the dark grey and light grey zones) which indicates uncertainty in the future. On the other hand, our Mean Absolute Percentage Error is 1.50% indicating high accuracy in our forecasting model.
Technical Outlook for the Stock
Support and Resistance Analysis
Graph 11: Support and Resistance Levels for SCCO (Tradingview.com as on 09/11/2020 )