Why Southern Copper Sees Hope In Ecuador

Jaiyant is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Southern Copper (NYSE: SCCO) has seen better days, and that was made obvious when it announced its first quarter results. Its net income fell by 20.3% to just $495.4 million. The company blamed its losses on lower ore grades at its Mexican and Peruvian mines. However, the future of the company is bright. Investors need to note that the company suggested in the first week of April that it is interested in investing in Ecuador, the country that is run by President Rafael Correa, known for his tirades against the developed world.

In this article, I shall discuss how investing in Ecuador will help Southern Copper regain some of its losses in the coming years, boost its production, and, ultimately, its income.

Proposed investments in Ecuador for exploration and mining

In the first week of April, Southern Copper revealed that it is awaiting planned reforms that the Ecuadorian government is planning to make, with regard to the current mining law. When Ecuador holds its next mining concessions to explore near its border with Peru, Southern Copper will try to bid the highest in order to win the auction. Ramon Hip, the company's executive in Ecuador, said that the investment will depend upon the deposits. Ecuador, at present, does not have large scale mines, but in the coming years the country will open several tracts of land for mining purpose so that revenue can be generated.

President Rafael Correa has emphasized the importance of mining sector

Ecuador's mining sector is, naturally, controlled by President Correa, directly and indirectly. His third term will begin this May, and the reforms are expected to happen next month. Though Correa is known for its tirades against developed nations, he is not an anti-Capitalist populist. He has firmly said previously that mining will be a priority for his government. Once Southern Copper develops a working relationship with Ecuadorian officials, it will quickly be able to move through the country's known bureaucracies. With Correa having mining companies' backs, Southern Copper can expect to run its business smoothly and successfully, depending on what the deposits are going to be like.

Southern Copper currently holds 2,544 hectares of exploration concessions in Ecuador, and that number is likely to increase significantly. As Ecuador shares its borders with Peru, it must be noted that mining fields that exist in Peru are often geographically jut inside Ecuador's territory. If Southern Copper gains exploration rights near the Peruvian border, it will be able to monetize higher grade ore that potentially lurks around these virgin fields.

Copper-associated companies have borne the brunt of a flaccid material market

Encore Wire (NASDAQ: WIRE), which is one of the more conservative copper stocks and a manufacturer of copper and other wires, announced its first quarter results, too. In a press conference, Daniel Jones, CEO of Encore Wire, noted that the company had a "fairly steady volume quarter." What he actually meant was, though the numbers weren't particularly impressive, it was steady, considering lower demand from China, economic conditions in Europe, and a general lack of demand for materials. Also, the company’s first quarter results of 2013 were mildly better than 2012's last quarter results. The company shall build a new aluminum wire plant in order to supply materials by the second quarter of this year.

Freeport-McMoRan (NYSE: FCX) is the world's largest publicly traded copper producer, and a stiff competitor to both Southern Copper and Encore Wire. Freeport-McMoRan reported reduced earnings as well, at just $648 million. Freeport-McMoRan operates in Peru and Chile in South America. Peru has been a disappointing fare for both Southern Copper and Freeport-McMoRan. If Southern Copper wins the bid in Ecuador, it will have a material advantage over Freeport-McMoRan in terms of better grade ores. Moreover, Argus downgraded Freeport McMoRan Copper and Gold from a "buy" rating to a "hold" rating. Analysts at Zacks have reiterated a neutral rating, while others have expressed similar views.

Take home

The take home is that most copper stocks are not doing exceptionally well, but it is not because of the companies themselves, but due to a decreased demand for copper in China, economic difficulties in Europe, and a reduced demand for materials internationally. Nevertheless, by investing in and exploring new territories, copper stocks can certainly future-proof their results. Thankfully, Southern Copper knew this even before it released its first quarter results. By expressing its interest in Ecuador, Southern Copper boosted investor confidence and trust.

Bottom line

I believe investing in Ecuador will be a value addition to Southern Copper’s international portfolio. As Ecuador is a mineral-rich nation, having a presence there will certainly boost Southern Copper’s production levels in the long term. Moreover, an Ecuadorian presence will provide Southern Copper with a competitive and exploratory advantage over other copper and mining stocks. That means investors should begin to consider Southern Copper as one of the most conservative and viable copper stocks in which to invest. 

After putting together a blockbuster deal to expand into the oil and natural gas industry, Freeport-McMoRan will have plenty on its plate as it tries to adapt to the new industry, as expanding into oil and gas carries plenty of inherent volatility. FCX had a profitable copper business, and on top of this foray into a new industry it still has to contend with mining industry bellwether BHP Billiton. To help investors determine if Freeport-McMoRan is a buy or a sell, The Motley Fool has compiled a premium research report on the company. Simply click here now to access your copy today.

Jaiyant Cavale has no position in any stocks mentioned. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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