Southern Copper Corp. (PCU) could be an interesting way to play the long side of a commodity rebound. The company produces copper, molybdenum, zinc and silver. The company has exploration projects in Peru, Mexico and Chile and has been working to improve its bottom line by focusing on cost controls and production enhancements.
Grupo Mexico SAB is the majority shareholder, owning about 79% of the stock. Grupo Mexico acts as a holding company for shares of companies engaged in the mining industry. Interestingly, Grupo Mexico has been adding to its stake in PCU since the market lows in October. Recently, it bought another 162,000 shares at prices of $15.76-$15.79.
In the 10K, the company refers to volatility of copper prices noting that “copper prices continue to improve into the 3rd quarter of 2008 from the 15-year lows from 2002. However late in the third quarter of 2008 the price of copper along with many of the world’s principal commodities weakened and began a decline that continued to date.”
The “company’s strength relies on its reserves, low costs, cash of $700 million and debt of $1.3 billion.” In 2008, the company bought back shares worth $385 million of the $500 million that was previously authorized. Sales in 2008 came in at $4.9 billion, down from $6.1 billion in 2007. The company earned $1.4 billion in 2008 vs. earnings of $2.2 billion in 2007. The year-end drop in commodity prices and lower sales volumes caused the drop in revenues and earnings. The company also lost about $75 million from currency exchange after the Mexican currency was devalued. The company has about $1.3 billion in debt in 2008 vs. $1.46 billion in 2007.
If commodity prices continue moving higher this could make for an interesting long. The market already seems to be sensing this with the nice rounded bottom formation seen on its 6 month chart below:
Disclaimer: This article was co-authored by my head analyst at The Inflection Point, Tom Henderson. We are looking for a higher high of $19.85 before initiating a long position in PCU.