PCU

[David Randolph]

Good evening, this is my first buy recommendation for the 3 Stocks on Fire Portfolio in about 8 months. I'm very pleased to be back at co-managing the portfolio with my dear friend Ramsburg.

We'll buy PCU tomorrow at the open, 6.66% of the portfolio as always. The analysis that justifies this recommendation is below and was made on Sunday, November the 5th. This thread will be updated every day with new information. You may ask any questions you please, or make comments along the way, that I'll try to address them the best way I can.

It's good to be back  

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.

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.

[bocasva]

This feels like 'deja vou'.    DR is back in town!!!   

Uno para todos y todos para uno.....

[422fwhp]

I have a friend that works for a division of CMC (steel) and he says they've been having record sales over and over...fwiw, the chart looks to have the same pattern.

[TD]

David... You have been missed, we are SOoooooo glad you're back!
Never heard the complete story on what happen with you , but assume everything worked out for you and we couldn't be happier....BEST WISHES... Now lets make some $$$$...td

[David Randolph]

Thanks for your kind words bocasva, 422fwhp and TD 

PCU will be added to the 3 Stocks on Fire Portfolio @ $53.80 (I forgot the password to put trades on the website, will have to wait for Ramsburg to remind me).

Going forward I'll update this thread daily after the close.

[David Randolph]

PCU did close at an all time high today with volume above average. The technical target of this breakout, as I said on the initial analysis, is $75. PCU will continue as a holding of the 3 Stocks on Fire Portfolio.

[jorgegr]

Don't be surprisedabout the volume increase !!!  its the 3SOF efffect on the market 

Your TA was mentioned among others, in the Yahoo boards

[Leaira]

Great pick!!

If this stock goes above $56 on Tuesday, I'm gonna buy some December 55 call options.  I have a contingency order set up!  Hope this turns into another LVS like I missed a few weeks ago!   

Leaira

[Leaira]

This may even be a good LEAPS candidate since it has a low float, and has the potential to do more stock splits.

Leaira

[jorgegr]

Hey, wellcome back Leaira
Nice to see another fellow  "3SOFter" again ! !

[Leaira]

Well, I'm in with 20 contracts of the Dec. 55 call option.  I was up $800 earlier today, but now I'm back to break-even.      I hope this goes back up tomorrow.  I don't like the big gap at open today.  I would have gotten a better fill if it executed at 56 instead of 57.

Leaira

[David Randolph]

Well, I'm in with 20 contracts of the Dec. 55 call option.  I was up $800 earlier today, but now I'm back to break-even.      I hope this goes back up tomorrow.  I don't like the big gap at open today.  I would have gotten a better fill if it executed at 56 instead of 57.

Leaira

Leaira, you're all stressed up because of that options game. I know I will never, ever, buy or sell an option, but you wouldn't understand why (I say this because I had the same type of advice and I did it anyway - not options, but futures). I think you need to experience it yourself. Some people are risk takers, it's in their nature. I was one of those people, but I'm cured now.

Coming back to PCU, you're right, that gap up at the open led the way to some profit taking. Nothing serious, as the stock still closed up 1.4% (the market was up just 0.38%).

Because of my technical and fundamental analysis I believe this stock will be up at least to $75 over the next couple of months. But it won't go up in a straight line. There will be negative days. I hope those negative days won't wipe you out of your position, which seems to be too big in size (the size of your position is much more important than the direction of the trade for long term successfull trading).

I will implement a policy on my 3 Stocks on Fire Portfolio managed trades: Never let a profit turn into a loss. If PCU prints $54 I'll sell it. If not I'll continue holding expecting the bullish trend to continue.

[capricho]

Welcome back David! We all missed you...

[Maestro]

Well, I'm in with 20 contracts of the Dec. 55 call option.

Leaira, I was interested in your call option strategy. Now that you've got the DEC/55 contracts, what's your exit plan? Is it similar to your entry plan, i.e are you setting triggers to sell the options if the underlying stock price drops or increases to a certain level?

Maestro

[Leaira]

I have a contingency stop order to sell the contracts if the stock drops below the 5EMA, which is about 54.80.  The low of the day is 55.20, so I'm still in the trade.  Down $1000, but still in the trade.  I don't use contingencies to sell contracts at a target price.  I just keep moving the stop to follow a certain moving average.

Leaira