Should These Copper Producers Be Worried?

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The long-awaited Chinese Third Plenum ended disappointingly for copper investors. The resulting document was full of good intentions but lacked specific measures to improve economy. Doubts about the ability of China to continue its growth at current rates have pressured metals throughout the year. Is it time to worry for shareholders of companies like Teck Resources (NYSE: TCK  ) , Freeport-McMoRan (NYSE: FCX  ) , and Southern Copper (NYSE: SCCO  ) ?

Southern Copper is at biggest risk should copper prices decline further
The first thing to note is that only Southern Copper is a pure copper play among these companies. Yes, Southern Copper also produces molybdenum, zinc, and silver, but copper provides the lion's share of the company's revenues.

Copper accounted for 35% of Teck's gross profit in the third quarter of this year. Met coal brought 45% of its gross profit despite the fact that met coal prices were at their lowest levels during the quarter. Since then, the situation improved, and met coal prices rebounded a little.

Freeport-McMoRan went into the oil and gas business this year with the acquisitions of McMoRan Exploration and Plains Exploration & Production. Freeport-McMoRan had to raise a huge amount of debt to make these acquisitions a reality, but now the move starts to pay off. Oil prices are clearly in a better shape than copper prices, and the diversification helped Freeport-McMoRan's shares gain 14% this year.

Southern Copper and Freeport-McMoRan carry a big debt load
All three companies are growing their copper production. Teck's third-quarter copper production was 7% higher than in the previous quarter, while Freeport-McMoRan managed to deliver 14% sequential growth. More copper on the market raises the need for more demand to keep prices stable; this is why news from China is so important.

Southern Copper plans to raise its production to 1.2 million tons from the current 630,000 tons by 2017. To support this plan, the company is engaged in multiple projects in Mexico, Peru, and Chile. Southern Copper spent as much as $1.19 billion on capital expenditures in first nine months of this year. The company's debt stood at $4.2 billion at the end of the third quarter, and it would present a risk if copper prices stay depressed for a prolonged period of time.

Freeport-McMoRan's debt was $21.1 billion at the end of the third quarter. Further decline in copper prices could jeopardize company's plans to reduce it to $12 billion in three years. Teck Resources is in a better position with only $325 million of debt maturing between now and early 2017.

Bottom line
Freeport-McMoRan is still cheap despite the recent run-up and trades at 11 times future earnings. I think that investors should focus on the company's diversified asset base rather than on the amount of debt. In addition, the stock provides an attractive 3.48% yield.

The position of Teck Resources is more vulnerable. Both met coal and copper prices greatly depend on news from China. On the bright side, Teck's met coal production looks healthy even in the current environment, while a lot of other coal miners struggle to make ends meet.

Southern Copper will be the greatest loser in the case of a copper price depreciation. Not only is Southern Copper's revenue almost solely dependent on copper, but the company is highly invested in future copper production. These worries are reflected in the stock price, which is near the year's lows.

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Related Tickers

9/23/2016 4:01 PM
FCX $10.63 Down -0.35 -3.19%
Freeport-McMoRan C… CAPS Rating: ****
SCCO $25.96 Down -0.31 -1.18%
Southern Copper CAPS Rating: ****
TCK $18.18 Up +1.15 +6.75%
Teck Resources CAPS Rating: ***