Southern Copper Corp: Rising Copper Prices, Attractive Dividend Yield

| About: Southern Copper (SCCO)

Southern Copper Corp (PCU) is the fourth largest copper producer in the world and a leading producer of zinc, silver, and molybdenum. SCC's conducts mining and smelting operations are in Mexico and Peru with exploration activities conducted in Mexico, Peru, and Chile. SCC is the largest miner in both Mexico and Peru. Grupo Mexico (OTCPK:GMBXF) is the largest shareholder with a controlling shareholder of 75.1% stake.

Normally, most investors will shy away from a foreign major holding a majority stake as there is a risk of transfer pricing or dilution which would destroy shareholder value. But from the moment Grupo Mexico raised its stake through an asset injection it has acted like a kind parent. The main risk is actually a benefit to minority shareholders. Grupo Mexico plans on moving the excess cash flow up to the parent company through quarterly dividends which gives the stock a dividend yield of approximately 7%, far above other mining stocks and an excellent play on rising copper prices.

The Mexican operations consist of 8 mines utilizing open pit and underground operations with two smelters. The primary mine, the Cananea Unit is the longest operating mine with operations tracing back to 1899. Unlike most mines where the ore grade declines as the mine goes deeper, the grades at Cananea have remained consistent.

In Peru, SCC operates 2 open pit mines at Cuajone and Toquepala on the western slopes of Cordillera Occidental, the southern Andes Mountains of Peru. Recent upgrades to the concentrators and smelter at Ilo allow for better recoveries within the production process.

SCC is currently exploring a number of deposits throughout Peru and Chile and has identified a number of targets for drilling and further exploration. The Los Chancas project in Peru is currently in pre-feasibility stage with drilling results returning a mineral deposit of 200 tons grading 1% copper, 0.07% molybdenum, and 0.12 grams of gold per ton.

In Mexico, SCC has three significant projects, El Arco, Buenavista, and Angangueo. El Arco preliminary investigations indicate a deposit with 846 million tons of sulfide ore with initial grading of 0.51% copper and 0.14 grams of gold per ton. Angangueo's drilling identified 13 million tons of ore with a reserve estimate of 0.16 grams of gold and 262 grams of silver per ton along with 3.5% zinc, 0.79% lead, and 0.97% copper. The Buenavista project projects a reserve of 36 million tons of ore with grades of 3.3% zinc, 0.69% copper, and 29 grams of silver per ton in an area adjacent to the Cananea ore body.

During 2006 SCC developed projects in Peru related to crop planting, cattle raising irrigation, and water resource management to assist the local communities in building basic industry that does not revolve around mining to assist in the eventual transition to self-sufficiency when the mines life ends.

In Mexico, SCC works with the local communities on a wide range of educational, environmental, and social issues.

SCC's social responsibilities to their communities revolve around supporting cultural and religious expression, educational programs, rural and urban communities, the governments and company's health care initiatives, and encouraging production chains in the communities where the company operates.

Recent elections in both Peru and Mexico have placed left leaning politicians in power but political risk is expected to be minimized as both governments realize the benefits the mining industry provides in a number of areas. In Peru, the government has learned from previous mistakes and wants to continue the economic revival going on in the country. The Peruvian stock market has one of the best returns in the world over the past one and three year timeframes with citizens becoming more and more confident over the countries future.

The biggest risk comes in the form of lawsuits between AMC and Grupo Mexico involving a transfer of assets from Asarco to SCC. SCC has not been formally named in the legal proceedings but in the course of various legal proceedings it may be enjoined depending on the various rulings.

For the first quarter of 2007, net sales increased by more than 20% on the back of stronger metals prices and increased production. Cost of sales rose by almost 15% and the EDITA margin expanded to 64.6%. Earnings per share were up by 33% over the year earlier period and a dividend of $1.50 per share was announced.

Southern Copper Corp. is an excellent play on rising copper prices with an attractive dividend yield for investors. Exploration in Peru and Mexico has identified attractive deposits which should offset any decline in ore grades from currently operating mines.

Source: Southern Copper Corp. website, 10-K, and 10-Q filings.

Disclosure: The author owns shares in Southern Copper Corp.

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