PCU

[David Randolph]

1. Introduction

I'm looking for something really positive on PCU, since I'm a long term bull in metal prices like copper and zinc. Copper prices are up 374% since the start of 2003 and Zinc prices are up 500% in the same period. Although these are incredible price advances, you don't see any excitement or big increase in expected production. In oil you see many new people coming into the exploration business, but not many are getting interested in opening new copper or zinc mines. Demand will probably continue to grow as the world is growing like it's the 1960's.

Another thing that I find appealing on copper/zinc/molybdenum mining stocks is that the price of their product rose much more than, for example, gold and silver, and yet, they trade at much lower multiples. Michael, which is an incredibly smart analyst at 3 Stocks on Fire, says this happens because gold and silver are rare materials, and copper and zinc aren't. He has a point, but still, I see more junior companies looking for gold than for copper, despite the price advance in copper and current margins are higher than in gold.

Let's see if PCU really has attractive technicals and fundamentals. By the way, if you want to receive more stock ideas, every day on your mailbox, please register to get the 3 Stocks on Fire free newsletter.

2. Profile

Southern Copper Corporation (PCU) engages in mining, processing, and producing copper, molybdenum, zinc, silver, gold, and lead. The company's operations include open-pit and underground mining, concentrating, copper smelting, copper refining, copper rod production, solvent extraction/electrowinning, zinc refining, sulfuric acid production, molybdenum concentrate production, and silver and gold refining. It operates the Toquepala and Cuajone open pit copper mines in the Andes, Peru; and Cananea mine and La Caridad copper mine in northern Mexico. The company also operates copper smelter and refinery facilities in Ilo, Peru. As of December 31, 2005, it produced 1,521 million pounds of copper; 317 million pounds of Zinc contained in concentrate; 33 million pounds of molybdenum contained in concentrate; 18 million ounces of silver contained in concentrate; and 32 thousands ounces of gold contained in concentrate. The company, formerly known as Southern Peru Copper Corporation, was incorporated in 1952 and is based in Phoenix, Arizona. Southern Copper Corporation is a subsidiary of Americas Mining Corporation.

3. Technical Analysis
3.1. All History Chart



The all history chart shows the big price advance that started in late 2003. The stock is near its all time highs. Is it still attractive?

3.2. Medium Term Chart



This is what a really long term ascending trend looks like: We have bounces from the 200 day moving average that push the stock to new highs. The 2006 low was $35. After this period of consolidation, if the stock breaks $55 on the upside the technical target of that breakout will be $55 - $35 = $20 + $55 = $75 !

3.3. Short Term Chart



The short term trend is up. PCU is poised to breakout to new highs. As support we have the $49.67 level, the 200 day SMA and an ascending trendline.

Let's make some fundamental tests ...

4. Fundamental Analysis
4.1. Number of Shares Outstanding



There was a big share sale in 2005, but the number of outstanding shares is stable since then. I don't expect any dilution from PCU, the company is even distributing strong dividends, so clearly it doesn't need shareholder's money. The current market cap is 294,460,850*$53.28 =  $15.69 B.

4.2. Liquidity



The balance sheet is growing stronger and stronger. PCU now has $1.4 B in working capital.

4.3. Revenues



There's huge revenue growth in 2003, 2004, 2005 and expected for 2006 and beyond.

4.4. Profits



Again, spectacular earnings growth for the past 3 years. The estimate for 2006 is $7.15, so the earnings multiple is $53.28 / $7.15 = 7.45. This is less than half the market average. Clearly the market thinks these very high metal prices won't sustain for long. But what if they do? What if they rise even more? For example, Zinc prices rose 30% just in the last month, with the introduction of the Zinc ETF on the London Metals Exchange.

Also, you need to consider the big dividend this company is paying shareholders. This year they already paid $3.75 a share, so I suspect they'll pay about $5 in full 2006. This is a 9.4% dividend yield

5. General Overview

Despite the incredible revenue and earnings growth, the strong balance sheet and a 9.4% dividend yield, PCU is trading at a very cheap valuation. This probably happens because people expect a fall in metal prices. They don't believe the trend is for real, as they know that when a commodity price rises a lot, new supply comes to the market as new producers get into the party near the top, attracted by the high margins.

But I just don't see this yet, as I said, every one is aware of the rise in oil but there isn't much people paying attention to metal prices. The BRIC countries, Brazil, Russia, India and China will continue demanding more and more of these products and there's not enough supply at this point.

As three billion people from the BRIC reach a certain level of development, perhaps we'll never see much lower prices for copper and zinc again. Remember, 3 billion "new" people are coming to the world economy now, that's ten times the population of the US.

6. Trading Plan

I wasn't planning on buying anything until the end of November, but I think I won't pass this one and I'll talk to Ramsburg so we can include PCU on the 3 Stocks on Fire Portfolio, 6.66% of capital as always. On the Premium Service of www.3stocksonfire.org we maintain a public and diversified portfolio of US traded stocks, which is rising 224% since April 2005. On that service we update our analysis with new information every trading day and provide a specific and detailed trading plan.

If you would like to receive more analysis like this on your mailbox, please register. If you want access to the 3 Stocks on Fire Premium Service, please apply for a 14 days free trial.

[jorgegr]

Nice to have you back David.
Coincidently I bought this stock on Oct 30th.
I have been in and out of PCU and CUP for some time and fortunately had good
tradings on them, they are highly related to China's demand so have to keep a
constant eye on their production and volatility and miners strikes in other producing
countries, therefore I'm sure you will be very comfortable making money on copper
stocks where you have to make a permanent mix of TA, fundamentals, worldwide
availabilities of this metal and politics, specially elections in underdevelopped
countries which produce and process a great deal of the supply.

Of course CUP is much more speculative

Good luck to you and look forward to read your recommendations

jorgegr

[ScottishTrader]

I may have been a bit reactive, but that was a very ugly breakdown today.  I think PCU may be due for a correction here.  Sold @ 55.28 after it tanked from the continuation wedge on the intraday.

Loss on the trade: $55.50 or 2% 

[setravis]

They are Bearish patterns, so watch for the breakdown, It's coming......

Rising Wedge (Reversal) Pattern.
The rising wedge is a bearish pattern that begins wide at the bottom and contracts as prices move higher and the trading range narrows. In contrast to symmetrical triangles, which have no definitive slope and no bullish or bearish bias, rising wedges definitely slope up and have a bearish bias.

Even though this article will focus on the rising wedge as a reversal pattern, the pattern can also fit into the continuation category. As a continuation pattern, the rising wedge will still slope up, but the slope will be against the prevailing downtrend. As a reversal pattern, the rising wedge will slope up and with the prevailing trend. Regardless of the type (reversal or continuation), rising wedges are bearish.

The rising wedge can be one of the most difficult chart patterns to accurately recognize and trade. While it is a consolidation formation, the loss of upside momentum on each successive high gives the pattern its bearish bias. However, the series of higher highs and higher lows keeps the trend inherently bullish. The final break of support indicates that the forces of supply have finally won out and lower prices are likely. There are no measuring techniques to estimate the decline -- other aspects of technical analysis should be employed to forecast price targets.

[David Randolph]

It came close to my stop level, since I don't want to let a profit turn into a loss - I'm in at $53.8. Copper prices are sliding a lot today. I believe this possibility was already discounted in the share price of PCU, since it had such an attractive multiple.

It would be nice to see it close above $54.96, if I get stopped out at $54 I'll try to nail it lower at support levels.

[ScottishTrader]

I think it could also have something to do with this....

Peru mine unions say preparing national strike
http://today.reuters.com/news/articlebusiness.aspx?type=tnBusinessNews&storyID=nN10182794&imageid=top-news-view-2006-11-10-075124-RTR1IBJI_Comp%5B1%5D.jpg&cap=The%20logo%20of%20electricity%20company%20Electricite%20de%20France%20(EDF)%20in%20Paris%20October%2014,%202006.%20The%20French%20power%20giant%20reported%20a%2020.6-percent%20rise%20in%20nine-month%20sales,%20slightly%20ahead%20of%20forecasts.%20REUTERS/Charles%20Platiau&from=business

[David Randolph]

Nice 5% pop today on this news: 9:40am 11/20/06 Phelps Dodge shares jump 30% on takeover bid by Freeport

I really need more copper plays, one of the best opportunities outthere !