If I could hold one position in my portfolio (long or short), it would be Southern Copper Corporation (SCCO).
While headquartered in Phoenix, Arizona, the Southern Copper Corporation is an integrated copper miner with operations in Latin America. With integrated mining interests, Southern Copper is involved in significant operations in copper including mining, smelting, and refining. In addition to mining copper it is also involved in silver, lead, gold and zinc mining.
The company has a smelter in Mexico, but its biggest operations are the Toquepala and Cuazone Mines in Peru; with a refinery and smelter also there. Recently Peru had a major change in leadership. Gone is the corrupt Fugimori Era. Ollanta Humala was recently elected as the country’s new president. His political views are centrist with a leaning to the left. His campaign platform was to distribute Peru’s assets more equitably to its people while still maintaining good relationships with its foreign business investors.
This style of governance is very much like Brazil’s leader, Luiz Ignacio Lula De Silva (Lula). When Lula presided over Brazil, the country rose to become the eighth largest economy in the world. Because of this, more than 20 million people rose out of acute poverty and a stronger Middle Class emerged. Dilma Vanna Rouseff, the newly elected President, is also from the same political party as Lula.
Southern Copper is about half the size of its main competitor, Freeport McMoRan Copper and Gold (FCX). In addition to operations in Latin America, Freeport McMoRan also has operations in Africa and Indonesia.
Southern Copper has world operations in the United States and the BRIC countries, (Brazil, Russia, India, and China). Although the United States is still climbing out of their Recession its other operations are doing quite well and have an insatiable demand for copper. It is also a financially solid company and pays one of the highest dividends for a blue chip company
Both Southern Copper and Freeport McMoRan are undervalued companies and are both in our managed portfolios. They both have extremely high returns on equity (in the 40% range). On price/earnings ratio and debt to equity Freeport McMoRan is better, but Southern Copper has a dividend that is three times that of Freeport McMoRan.
What I believe makes Southern Copper the better buy is that it is down sharply on concerns about the political situation in Peru. The stock plunged with the election of Ollanta Humala as president of Peru. Investors are afraid Humala will change his political leanings farther to the left like Hugo Chavez. As we know, Chavez nationalized the mines and significantly interfered in its operations. Based on all that I have read I believe that he will govern more like Lula in Brazil who presided over that country’s economic miracle.
Analysts are all over the place with respect to Southern Copper. The majority of these analysts are leaning neutral. It appears that investors are waiting to see how Humala governs. By the time that his governing style is known, I am afraid that, the price of the stock will have already made a sharp advance.
I think others are cautious because this is a cyclical industry; and the United States is still bogged down in a slowly healing economy. Their focus is more local than global.
Southern Copper is unique in that since 2004, Grupo Mexico has owned 80% its stock.
This gives the company a unique advantage in that with having such a large owner it does not have to be too concerned with quarterly earnings reports. Instead their leadership can focus on what is good in the long term for the company. This matches my investment philosophy of focusing on what is best for long-term investing.
Copper is a necessary commodity and I believe it is unlikely that there could be significant new copper discoveries anywhere in the world. Since this resource is an integral building component in the construction industry, this creates a significantly positive situation for Southern Copper.
In the inflationary times which we are entering, it is good to be in commodities such as copper. Commodities such as this one will rise as prices for other things rise.
A double dip recession would probably cause this stock to go lower in the short term. More significant would be for the newly elected president, Ollanta Humala to emulate Venezuela’s Hugo Chavez and nationalize the company and sharply increase taxes. Also Chavez interfered in other ways with the operations of the business, which turned off any additional foreign investment interests.
Disclosure: Author holds a long position in SCCO.