Albert Meyer

Copper and Resources Lead to Portfolio Outperformance

Hi Bill,

Great reply. Yes, Tenke is a risky proposition, but manageable. Both companies earn enough revenue from by-products to cut net copper production cost to the $0.60 to $1.00 per pound price range. PCU doesn't have stock options. CEO basic salary $600K per annum. PCU distributes most of its profits. FCX has super-sized compensation packages. FCX's gold and molybdenum reserves are attractive. I'd own both companies. PCU has better margins. PCU did not cancel its dividend. FCX used the fourth quarter of 2008 to write down its assets purchased from PD - ridiculous big-bath charge to boost future earnings. I frown on that, but the market punished the stock and it will be a good investment going forward.



On Mar 24 11:20 AM Bill Herbert wrote:

> Hi Albert,
>
> PCU is a stock that has been good to me in the past – but I haven’t
> followed it closely over the last year. I bought some in the teens
> and sold in the high thirties a couple of years ago, but held onto
> FCX and some others at that time. PCU has actually been less volatile
> than FCX, for whatever good that is in terms of portfolio stability.
>
>
> The risky things about PCU are its ownership/control by Grupo Mexico,
> and the geographic risk. All the mines are in Mexico and Peru – both
> mining-friendly, for sure. But Mexico has been melting down economically
> for some time, and I believe there is a lot of political/confiscation
> risk there. I know that Cantarell, the huge oil field in the southern
> Gulf that has bankrolled the Mexican economy for over twenty years
> is in serious decline, and lower oil prices are a big hit to their
> revenues. I believe that Mexico may have to impose new taxes or royalties
> on mining properties – which are numerous - and since a lot of the
> PCU stock is American-owned, they can say it’s for the good of Mexico
> and who really cares about the Americanos, anyway?
>
> Also, I don’t want to be at the whim of a large conglomerate (Grupo
> Mex) that may capriciously sell assets, do an unfavorable capital
> raise, or declare a large dividend to itself, as many have done in
> the past. I don’t have the time to monitor their honesty or capability,
> so I will pass even though they may generate great returns for investors.
> Note that in 2005, PCU did a $900 MM secondary, in which both the
> Pritzker family and Phelps Dodge (run by Adkerson) sold shares. Maybe
> that doesn’t mean anything, but they opted out of the PCU play, only
> to expand and develop other copper resources.
>
> There are safer ways to play the copper upside – and FCX also has
> a huge gold resource, which I like. On the negative, they may have
> an expensive boondoggle in Tenke, so they are by no means perfect.
> In general though, FCX has very solid management, and it took a ridiculous
> plunge to under $17 from its (overvalued) peak of $120. So it had
> fallen farther, and had more upside, IMO. Also, it has better access
> to capital, one would think, if it decides to get acquisitive. There
> are numerous properties out there just begging to be picked off by
> the majors – and some of them are in FCX’s back yard in AZ so they
> get economies of scale with existing infrastructure. I know they
> have mothballed some development lately, but longer term, it may
> be in their interest to lock up valuable resources at fire sale prices.
>
>
> Having said all that, I think that perhaps the best resource-based
> investments right now are selections from the MLP space in U.S. energy
> infrastructure. I hope to find the time to cover some of those names
> in a future update.
>

Copper and Resources Lead to Portfolio Outperformance

Great article. What's your take on Southern Copper?