Monday, April 11, 2011

Southern Copper (NASDAQ:SCCO): Tia Maria Project Cancelled; A Big Setback on SCCO’s Growth Plans

Southern Copper (NASDAQ:SCCO) could see some selling pressure this morning after the Peruvian government rejected on the eve of the elections (Friday) the license for the Tia Maria project.

Tía Maria is a $930mn project that would produce 120kt of copper when operational. It is located in Islay, in the Arequipa state of Peru. The project has faced strong opposition from local communities, and violent protests broke out recently after a UN-commissioned report was leaked signaling deficiencies in the environmental impact study submitted by Southern Copper.

Couple of tier-1 firms are out commenting on SCCO this morning:

- UBS cuts their tgt to $32 (prev. $34.50) and reits Sell noting SCCO should now have to submit a new environmental study. Given considerable local opposition, and the deaths of three protesters, they think this decision could rove difficult to reverse.

Tia Maria represents US$3.46 of NPV
The 120k Tia Maria project is the company’s only current Greenfield expansion. It was also the supposed to be the most advanced of the company’s expansions, scheduled to come on stream in early 2013. Representing close to 10% of the company’s production, and with a cash cost below the company’s long-term average, Tia Maria is a material project for the company.

Where to from here?
The company now has the option of submitting for a new environmental license, but would seem unlikely to do so near term given local opposition and the lack of government support. It would appear unlikely, however, for the full economic value of the project to be lost. They firm would view an eventual sale or a potential exchange of assets as also possible in the medium term. The financial impact is also likely to be mitigated by the positive impact that delaying the project is likely to have on medium-term copper prices.

- Morgan Stanley is out titled: Tia Maria Project Cancelled; A Big Setback on SCCO’s & GMEXICO’s Growth Plans

Investment conclusion: The cancellation of Tia Maria is a very negative development for Southern Copper (and Grupo Mexico) given that the project represented 22% of the company's copper volume growth over the next five years. The situation is particularly unfortunate because future capacity expansions are one of the company’s key competitive advantages. They continue to see project execution – now of planned brownfield expansions – as paramount for both Southern Copper and Grupo Mexico to meet market expectations.

Removing Tia Maria from estimates: Morgan Stanley is removing the project’s volume contribution from their SCCO’s and Grupo Mexico’s models. The 120ktpy copper (cathode) project was scheduled to start operations in 4Q12. For 2013, their new EBITDA estimate for SCCO is $5,419M (-9% from previous estimate) and for Grupo Mexico is now $6,785M (-7%).

Notablecalls: To add insult to injury, it looks like a left-leaning Ollanta Humala is leading the Peruvian vote (as of early Monday). You can pretty much imagine Ollantas views regarding Phoenix-based Southern Copper's aspirations to mine copper in Peru.

Not only is (or rather was) Tia Maria worth $3-4/share in NPV, SCCO faces declining production. That's rarely seen good for miner valuations.

The stock stock took a 1+ pt hit on April 7 after the Peruvian government proposed a 180-day interruption in the analysis of the Tía Maria environmental impact study, so it's surely prone to move on today's news.

Anyway, one to watch on the short side today. Could drop multiple points. $38-37 range?

4 comments:

notablecalls said...

not sure what to call it.

The thing with these commodity plays is that they trade partly off the underlying commodity. Makes them tough to trade sometimes.

I guess I just should have gone with the MCP @ JPM.

bl said...

yep, ya never know until the market opens and the drama unfolds!

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