A lot has changed globally as well as in the U.S. since the last time I wrote about Southern Copper Corp (SCCO). It was in early November, right after the election, and I asked if it was too late to invest in the bullish move the stock had been in. We were facing a few major hurdles as the year was coming to a close and things did not look very good. Here is what I concluded from my observations at the time:
None of this bodes well for copper prices. There is just too much out there that can influence the economy in a bad way right now. I am expecting the economy to shrink somewhat and copper prices to peak and turn down soon.
The stock was trading at $35.16 at the time, and presently, it is at $40.02. In the last three months, I have observed a 13.8% increase in the value of the stock. How long can it keep climbing? I guess the best answer to that would be to look at how copper prices have been doing.
If we observe the weekly chart for the Copper ETF (COPX), we can see that the price of copper has been on a steady rise since it built a base since the summer of 2012, but has now reached an important resistance area for a longer term downward move. I guess support is the next defining movement for the price of copper. Perhaps the biggest influence on copper price is demand and that comes from China. China accounts for approximately 40 percent of global demand, and when its manufacturing expands, so does the demand for the industrial metal.
A 2013 estimate by Barclay PLC has shown copper demand will exceed supply by 316,000 metric tons in the first half of 2013, before reaching a surplus in the second half of the year. China's demand for the metal is expected to grow by 5.5% this year, while the global demand grows at 3.4%. This is a good sign for copper through the year. The Macquarie Group appears to have a similar outlook on copper. The bank expects a stronger H1 in 2013 and then see the demand become weaker in H2. It has this position:
Copper and tin are likely to be the biggest near-term beneficiaries of improved apparent demand through the first half of 2013, with supply availability still limited. It could be a year where copper sees higher highs and lower lows than in 2012.
So it looks like copper should be in demand the first half of the year, and I would expect the demand to continue to bode well for copper prices through the first half of the year. What do I think this means for Southern Copper? I believe this should also fare well for the mining company through the first half of the year, and it could mean the present move up may continue into the near future. If copper outlooks are true, I would expect to see the stock top out and possibly turn down by midyear or into the second half of 2013.
I am not sure if Citigroup has the same outlook as I do, but it recently downgraded its rating on Southern Copper Corp. from Buy to Neutral, and reiterated its $41.00 price target. This is what Citigroup had to say:
We downgrade Southern Copper to Neutral with an unchanged target price of US$41/sh (and remove the stock from Citi's Latin America Focus List). The company's copper assets are virtually unique and the stock remains a relatively superior long-term holding amongst miners but valuation is rich at dividend yield <5% and 18x PE, in our view.
It appears that Citigroup believes the stock is a bit overvalued at this point. The phrase "valuation is rich" is a polite way of say "look elsewhere." Trading at 18x PE, I believe it will still move higher and trade at a higher (x PE) before it is done moving up.
Throughout the article I have explored SCCO's move up and what could cause the stock to slow down and possibly reverse direction. Presently, the stock has regressed from its overbought position the RSI indicator gave it toward the end of January. It has moved down, but now sits on the middle Bollinger Band moving sideways. This could just be a consolidating period before it continues to move up. The MACD conforms the weakness as the MA's continue to journey down, but even they are above the '0' line like the RSI is above the '50' marker. For this reason, I am of the opinion that the stock is consolidating and will continue to move up when is done instead of moving down.
Short Term Income Play
The stock is presently trading at 39.67 and I believe it is consolidating before it moves back up. It appears to be using the 40 day MA is support. Since it is early in the year, and I expect copper to continue to increase in price for the near future, I would expect SCCO to follow suit. For this reason, I will suggest two short term income plays:
The conservative approach would be a bull call debit spread.
- Buy an April 2013 call with a strike of '40' (priced at $1.40)
- Sell an April 2013 call with a strike of '41' (priced at $0.85)
- Net debit to start: $0.55
- Maximum Profit: $0.45
- Maximum Length of Trade: 10 weeks
If you are interested in more risk, you might consider buying the April 2013 call with the strike of '40' outright. More risk, but also more reward as the stock moves up.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.