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. IntroductionI'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. ProfileSouthern 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 Analysis3.1. 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 Analysis4.1. 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 OverviewDespite 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.
