The Long and Short
Southern Copper Corp. as a core holding
This material is a Marketing Communication and does not constitute Independent Investment Research.
Spreads on the debt of Southern Copper Corp (SCCO) have performed well over the last couple of years, tightening 60 bp to 80 bp across the curve before the April trade wars. With continuing tariff uncertainty and spreads at historical lows, upside seems limited. SCCO still should be core holding in an investment grade portfolio, with strong ratios to protect against incremental market weakness.
Southern Copper’s revenues came in at $3.05 billion in the second quarter, representing a small decrease of 2.2% both year-on-year and sequentially on softer prices and sales volumes, with copper sales down 3.0% year-over-year to 224kt. Prices were mixed sequentially across the product platforms with LME Copper slights lower while COMEX copper prices improved slightly: copper represented about 74% of sales in the period, in line with normal revenue splits. EBITDA of $1.79 billion in the second quarter was a slight decrease of 0.3% year-over-year with a margin of 58.7% (up 110 bp year-over-year and 280 bp versus the first quarter of 2025). Though our calculation of free cash flow yielded a burn of $306 million, the LTM EBITDA increase maintained net leverage at a conservative 0.5x (leases excluded), flat sequentially and lower than the 0.7x in the corresponding period last year.
Copper prices have been volatile but generally trended upwards year-to-date amidst the tariff uncertainty and while the SCCO’s sales volumes may continue to enjoy exception status, the follow-on risk of slower global industrial production casts a longer shadow over bond price performance in the near term, even if regional trade negotiations find an accommodative resolution. The US administration proclamation, released yesterday, adds further pressure to orderly copper flows globally and may hurt demand, at least in the near term. Add to this the expectation of higher capital expenditure going forward and we envision a scenario of steadily higher net leverage, soaking up the current balance sheet flexibility, with the company likely to raise further international debt to fund its expansion initiative.
Regarding the latest announcement from the White House: while the tariffs are designed to incentivize domestic US production, they remain somewhat limited. In 2024, the US consumed 1.6 million mt of copper though produced only 1.2 mt, primarily from operations in Arizona, Utah and Nevada. Further, the US only has 585,000 metric tons of domestic smelting capacity. Thus, a large share must be exported for processing, highlighting a critical gap in the supply chain. The majority of US copper ores and concentrates were shipped to Mexico (27%), Canada (23%), Japan (22%) and China (18%), leaving US producers reliant on foreign smelters to complete the value chain. As such, the strategy to strengthening domestic capabilities is fairly critical; however, several significant obstacles remain:
- Copper production in the US is on the high end of the cost curve. Global cash cost of production is just above $2.00 per pound. In contrast, the average for US mines is about $2.65 per pound.
- Copper ore grades in the US are low. The five largest operating copper mines in the US, which account for two-thirds of US copper production, report an average ore grade is only 0.3%. Conversely, the average ore grade of the 10 largest operating copper mines in the world is about 1.1% or four times the US level.
- There are only two smelters in the US, and the economics of developing new smelters are weak at the moment. In 2025, smelting charges dropped to a historic low of $45 per ton. At these levels, smelters are operating at a loss.
This detail explains why the latest missive out of the White House is structured to allow a lot of what the US needs without tariffs, explained by the section in the release that says “Copper input materials (such as copper ores, concentrates, mattes, cathodes, and anodes) and copper scrap are not subject to 232 or reciprocal tariffs.”
In recent years, SCCO’s lower-than-guided capital expenditures have kept credit metrics at or below 1.0x for the company, buttressed by the 2024 copper price increases, part of which exited the structure in dividend payments. As such, looking forward, credit investors should frame relative value in the context of increased net leverage in an environment of meaningfully higher interest rates, soaking up more of the operational cash flow—about and beyond any system tariff impacts.
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