Turmoil In China Setting Up Buying Opportunity For Southern Copper

| About: Southern Copper (SCCO)


Depressed copper prices provide a buying opportunity for Southern Copper.

Despite weak prices, financial fundamentals for Southern Copper solid.

Southern Copper is the largest pure-play copper miner on the NYSE.

Copper has been one of the hardest-hit assets in 2013 and the start of this year. Economic slowdown in China and rumors of large copper stockpiles that will be sold to collateralize defaults in the Chinese banking system have held down prices. With nearly universal negative sentiment, along with the prospect of increased inflation in 2014, a bounce if not a major recovery of copper prices will likely occur later this year. While infrastructure growth is declining in China, many other emerging economies at earlier stages of development, such as the Philippines, Vietnam, Indonesia, and Colombia, along with frontier countries in sub-Saharan Africa are still in need of plenty of copper to complete needed additions to their nations' infrastructure.

The best way to trade an upswing in copper is through buying shares of Southern Copper (NYSE:SCCO). It is the world's fifth-leading producer, and has the world's largest private reserves of copper through its mines in Peru and Mexico. The company also has plenty of low-cost expansion opportunities on existing properties.

The financial profile for the company is strong, with 26% profit margins and return on investment capital of 22.6%, in spite of low copper prices. The resilience of the company's performance is due to having very low costs of production versus competition. A 29% year-over-year sell-off of the stock has made the valuation attractive, with a P/E ratio of 13.09 and PEG ratio of just 1.15. On a discounted cash flow basis, the company's value ranges from $26-$37 per share, which also makes the company seem cheap.

The only other comparable copper mining company is Freeport McMoran Copper and Gold, but its acquisition last year of McMoran Corp. and ventures into the energy sector do not make it a favorable investment for those looking to trade off a rise in copper. Smaller copper miners should be avoided, as they may lack the financial resources to weather a year of down prices without risk of default or shutting down production entirely.

Long Southern Copper

Daily price chart for Southern Copper

The Pardini Report recommends buying shares of Southern Copper with a $1.10 trailing stop upon the restoration of bullish technical momentum on the weekly time frame. Our buy recommendation is also contingent on copper being able to hold support in the $2.90-$3.00 range. Unless if copper prices hunker down below $3.00 a pound, SCCO has potential to be one of the best-performing stocks in 2014. However, in the short-term, there is plenty of downside, as the commodity collateralized loan system is starting to unwind swiftly in China.

*DCF based on 11% discount rate, 8%-13% earnings growth average over next five years, and 0%-4% growth afterwards.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SCCO over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.