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Why Southern Copper Stock Rose 15% in April

By Reuben Gregg Brewer – May 6, 2020 at 10:22AM

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Southern Copper rebounded in April along with the market, but investors shouldn't ignore the warning signs for difficult days ahead.

What happened

Shares of copper miner Southern Copper (SCCO -0.53%) advanced 15% in April, according to data from S&P Global Market Intelligence. That gain slightly outdistanced the 13% upturn in the S&P 500 index during the month. However, when Southern Copper reported first-quarter earnings at the end of the month, the news was clearly not all good. 

So what

Southern Copper is one of the world's largest copper miners. Copper is an industrial metal that belongs to an industry that tends to ebb and flow with the economy. With the world's efforts to slow the spread of COVID-19 basically leading to a broad economic shutdown, copper demand and prices are likely to fall. That dynamic, however, was only in play for a short period during the first quarter, which is why Southern Copper's earnings were rather disappointing.

A stack of copper pipes in different sizes.

Image source: Getty Images.

On April 24, the company announced that first-quarter sales were down roughly 2% year over year, but that net income was lower by 45%. There were a few factors involved, including rising operating costs. But the big issue was that copper prices were off by 9%. Though the company makes other products, including gold and silver (which saw price increases), copper is the key driver of its business.

With the world likely to be pushed into a global recession because of the coronavirus pandemic, it is unlikely that copper prices will rebound materially. In fact, Southern Copper is concerned enough about the future that it cut its dividend by 50%. That's probably a bigger warning sign than the year-over-year drop in earnings.     

Now what

Southern Copper will likely muddle through the economic pain caused by COVID-19. However, the impact of the coronavirus is only just beginning to be seen. The stock advance in April, largely tracking along with the broader market, was really just a rebound from a difficult March. The company's decision to trim the dividend by 50% is an indication that there's likely to be a lot more pain ahead for this miner. Long-term investors should prepare themselves for a rough patch -- after all, it looks like that's what Southern Copper is doing.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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