3 Reasons to Like Southern Copper

| About: Southern Copper (SCCO)

Early last week we saw Southern Copper (NYSE:SCCO) drop over 10% in one day due to the election results in the Peruvian presidential race. The firm essentially lost over $500M in market value in one day based off of a “promise” that an elected politician made early on in his campaign and hasn’t really brought up ever since. Now the newly-elected politician has come out and stated that there will be no new taxation for SCCO or other major mining firms. We understand that investing in a country such as Peru is going to entail political risk, as it comes with the territory, but what happened recently was completely overblown.

Southern Copper looks like another perfect example of recent investor overreaction. Let’s be clear that, as far as we are aware, no new royalty tax laws were signed, government forces haven’t seized assets, and this country isn’t operated under a hostile authoritarian government. In addition, we don’t understand why investors realistically believed that Peru could raise its mining tax at the snap of a finger when Australia’s government couldn’t even do it with an economy that’s on fire. Currently we see SCCO pricing at attractive levels and rank the firm a Buy for three reasons.

1. Strong Top and Bottom Line Growth

SCCO has navigated the global recovery well as a mining company, and in our view has plenty of steam left to keep on charging ahead. The firm so far has been able to generate top line growth with quarterly revenue growth (yoy) numbers in excess of 30%. Bottom line growth was no disappointment either, as quarterly earnings growth (yoy) was over 20%. Even with explosive top and bottom line growth like this, the firm also manages to offer a dividend yielding over 6%. In addition, the firm is flush with cash. The cash ratio (Cash/CL) alone for SCCO is almost 2. With numbers like this, it's tough not to recognize the potential this firm offers even with the risks involved

2. Iron-Clad Balance Sheets

Dig into the numbers of this firm and some might say you struck gold. The firm’s quick and current ratio illustrate ample liquidity levels with a number over 2.0. Even when going deeper and reviewing outstanding liabilities, we still find that the current assets of the firm alone could cover the bulk of what is listed. What can be seen from these balance sheets is that the firm’s management took great care in building up the company so that it could operate without any impediment, regardless of the global economic cycles.

3. Demand for Copper Continues with Global Expansion

Copper today still holds the nickname "Dr. Copper" for its continued ability to forecast global economic conditions. Look at a copper chart, including corrections, and what we find is that world demand today continues to be larger than what can be supplied.

Plenty of TV pundits would love to say there isn’t any “real growth,” but we disagree. The shortfall with their position is that they generally only focus on the developed world. Global growth today is lopsided towards developing nations. Second, developed countries don’t need to be going at full steam to help push copper prices higher.

We understand that in a best-case scenario the West remains in a recovery mode, but the East is clearly in an expansionary phase. By combining the West’s recovery with the East’s expansion, we actually have overall global expansion ... even if it’s slow.


The takeaway here is that great companies with strong fundamentals and sound dividends such as Southern Copper are getting beat up for unjustified reasons. That’s the reality of the situation, but what we care about is taking advantage of the opportunity when it arises. For those interested in macro-economic plays, we think SCCO is a Buy.

Last, people often ask we we aren't bullish on Southern Copper's competitor Freeport McMoRan (FCX); the reason is we feel that SCCO is a better pure play on copper.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SCCO over the next 72 hours.