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Southern Copper Corp. (PCU) – A Strong Commodity Stock

Southern Copper Corporation (NYSE: PCU), an integrated producer of copper, silver, zinc, molybdenum and other minerals, is both a thriving company and a stock that is still holding up under difficult market conditions. The company, which is headquartered in Phoenix, Arizona, has mining, smelting and refining operations in Peru and Mexico, with exploration there as well as in Chile.

The company ultimately processes copper for all industrial uses. Southern Copper is the fifth largest copper company in the world, and has shown continued growth.

The company has 75 percent of its mining reserves in copper. It engages in open-pit and underground mining, and also mines high in the Andes, over six hundred miles from Lima, Peru. It owns Minera Mexico, a subsidiary, which it purchased in 2005. Seventy-five percent of the stock in the company is owned by Grupo Mexico, with many of the remaining shares in the hands of institutional investors.

Southern Copper has a market cap of $34.5 billion, with 2007 revenue at $6.1 billion, which produced net income of $2.2 billion, or $7.56 per share. In the three years prior to 2007, the EPS has been as follows: 2004: $5.03, 2005:$4.90, 2006: $6.84. Projections for 2008 are $8.70 per share, which would be an increase of 15 percent. The company has a projected annual income growth rate of 15-20 percent for the coming years. The stock has traded between 73.25-143.25 in the last twelve months, with a recent price in the 117 range.

Over the last five years, the stock has climbed from under 20 to over 143. It trades at a PE of 15.5 and pays an annual dividend of $5.60, which at recent stock prices was a yield of 4.75 percent. It has relatively low long term debt at $1.3 billion, considering the capital-intensive nature of mining and refining activities, and its cost of copper is 15 cents a pound while the selling price has been around $3.00 per pound, a twenty-fold markup.

All these numbers suggest a healthy company in a healthy underlying business. While the metals and commodities sectors have been booming the last couple of years, the stock market phase of that boom has certainly been over for awhile. But with the world’s continued high demand for copper for industrial use expected to grow steadily, the industrial metals sector should prosper. With Southern Copper as a well-run, low-cost producer in that sector, the company looks to have solid prospects as well, both in the short and long term. The global demand for industrial metals, and copper use in particular, should continue to increase in both the developed and developing world.

Southern Copper, which competes on the global stage with other metals producers such as the formidable gold and copper producer Freeport-McMoran (NYSE: FCX), has shown a prudent management style in maintaining a strong balance sheet and has been prudent also in the way it has expanded. It has not simply acquired other companies or operations for the sake of expansion, but has kept its focus on its core copper producing operations and tried to enhance where it could. With strong copper reserves as well as cash reserves, and a healthy cash flow, Southern Copper has knitted this with experienced management which understands both the financial elements as well as the mining and engineering demands of its business. This type of integrated management is an asset itself.

Mining and metals producing companies and stocks can be among the most boring, overlooked or even misunderstood by investors, though Wall Street seems to have a good understanding of Southern Copper’s ability and potential. With the commodity boom/bubble cooling off, longer term investors can return to keeping their eye on this stock, though it also has potential for short term take-off should the economy and the market turn in the next few months. Look for Southern Copper to remain an enduring growth company as well as a strong stock to consider.

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