Southern Copper (SCCO) conducts mining operations in Peru and Mexico. The Company owns and operates open pit mines and metallurgical complexes that produce copper, molybdenum, zinc, and precious metals. While investors wait for an economic turn around, this company continues to struggle as a victim of weak macro-economic conditions. It is not a secret that many investors consider copper to be a reliable barometer for the health of the global economy because it has so many uses in construction and manufacturing. For this reason, this company is expected to remain bearish until we see a turn in conditions. While investors wait for a long term entry point, short term income opportunities present themselves!
Copper mine production in 1Q12 increased by 23%, compared to the 1Q11, mainly because of better ore grades at the company's open pit mines and because the mine in Buena Vista was operating at full capacity; refined copper and rod production also increased by 16% and 17% respectively. Total copper production for 1Q12 was 154,233 tons. This is reflected in the price of the stock as it rose through most of January, peaking just above 36.
But we have a down hill battle since then.
Copper Prices Fall
Commodity prices across the board have continued the steady bearish trend on concerns of slowing growth in China Greece, and recently Spanish debt. These are all signaling weaker demand for the metal. At the end of May, copper had already hit a four month low. A closely watched index of factory output in the Chicago region fell for a third straight month to the lowest reading since September 2009 and the. The Institute for Supply Management-Chicago warned that three consecutive declines have been associated with the onset of last seven national recessions. Meanwhile, Europe is still struggling with its financial troubles and China is working to stimulate its slower economic growth.
So we are going to continue to see prices gravitate toward the cellar until we have a solid economic turn around. These things do not happen over night. For this reason I am looking at Southern Copper for a short term income play and waiting on a long term investment look until closer toward the end of the year.
The Option Play
- Buy a September 2012 put with a strike of '29' (priced at $2.45)
- Sell a September 2012 put with a strike of '28' (priced at $1.80)
- Net Debit to Start:: $0.65
- Maximum Profit: $0.35
Reasoning behind the Trade
- We expect copper to continue to go down as the stock is also in a bearish trend.
- It will be awhile before the economy turns around.