Southern Copper Could Topple Estimates

Southern Copper is expected to post robust first-quarter earnings on the back of stable volume growth and higher copper and byproduct prices.
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Southern Copper (SCCO) - Get Report is expected to post robust first-quarter earnings on the back of stable volume growth and higher copper and byproduct prices, which will likely offset marginally higher production costs.

China drove the demand for copper during the first quarter, with imports rising 14.2% over the corresponding period last year.

Analysts polled by

Bloomberg

estimate Southern Copper will report earnings of 52 cents a share on sales of $1.31 billion, compared with earnings of 9 cents a share on sales of $622 million a year earlier.

Tracking the upbeat performance of copper majors

Freeport-McMoRan Copper & Gold

(FCX) - Get Report

and

Teck Resources

(TCK)

, Southern Copper likely will beat analyst expectations.

Last week, JPMorgan upgraded Southern Copper to "neutral" from "underperform" and revised the December 2010 price outlook to $38.50 from $33.50. Southern Copper will likely outperform its peers given the bullish scenario for copper prices, since a 1% increase in copper prices is estimated to raise the company's equity value by 1.3%.

A revised capital expenditure plan of $2.8 billion for implementation over the next four years is expected to elevate production by about 340,000 tons a year. In addition, the plan is expected to improve the cash cost position of the company, driven by the lower cash cost profile of new projects. Resumption of operations at the Cananea mine will likely boost copper production to 1 million tons a year over the next four years.

Southern Copper announced a quarterly dividend of 45 cents a share last week, indicating bullish cash flow generation.

The stock has five buy, four hold, and no sell ratings, according to

TheStreet's

Analyst ratings guide.

Freeport reported net income of $897 million, or $2 a share, exceeding the consensus estimate of $1.82 a share of analysts surveyed by

Bloomberg

. Meanwhile, Teck Resources reported earnings of $908 million, or $1.54 a share, exceeding the consensus estimate of 74 cents a share of analysts.

The companies attributed their outstanding performance to higher copper prices that almost doubled in a year. Freeport's realized average copper price was $3.42 a pound for the quarter compared to the price of $1.72 a pound reported in the first quarter of 2009 while Teck's copper price realization was $3.27 a pound on an average in comparison to the $1.56 a pound last year.

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Freeport's copper production declined 10.8% to 929 million pounds from the year-ago period. However, management estimates the sales volumes in the second half of 2010 to be higher than the first half, following mining sequencing at Grasberg mines. In consequence, copper sales volumes are estimated to reach 3.8 billion pounds for 2010. However, costs a pound are estimated to increase from 81 cents a pound for the first quarter to 88 cents a pound for 2010. Further, the idled operations at the flagship mine in Morenci, southeast Arizona, are likely to be revamped this week.

Similarly, Teck Resources is expected to increase copper output. President and CEO Don Lindsay said, "The remainder of the year is also expected to see the benefit of increased copper production from the Andacollo concentrate project, which is the first in our pipeline of copper expansion projects."

While Freeport increased its quarterly dividend to 30 cents from 15 cents, Teck reinstated its dividend at the annual rate of 40 Canadian cents a share in semi-annual payments.

On Tuesday, Moody's upgraded Teck's long-term debt to Baa3 from Ba1 on the back of debt reduction, business diversity and size, high-quality/low-cost assets primarily in politically stable regions, and an excellent liquidity profile comprised of a large cash balance.

Southern Copper, Freeport, Teck Resources are currently trading at price-to-earnings multiples of 14.84, 9.25 and 10.96, respectively. The three big mining giants,

Vale

(VALE) - Get Report

,

Rio Tinto

(RTP)

and

BHP Billiton

(BHP) - Get Report

, which also produce copper, are trading at P/E ratios of 10.84, 9.46 and 11.34, respectively.