Nainara (< 20)

Southern Copper: Shop Elsewhere

November 29, 2008 – Comments (2) | RELATED TICKERS: PCU

This is a short blog response to TMFSinchiruna's excellent post and article Bargain Stocks On Black Friday: Souther Copper.

I own shares of PCU and I love the company from the perspective that they run lower overhead expenses for management than their competitors. They also continue to pay out a significant dividend, although how long that will last in the current environment is anyone's guess. PCU had a significant cash reserve as of the end of September and appears to be in a strong position to wait out this economic downturn. In the long term I agree with TMFSinchiruna that Southern Copper is at a bargain at this price. I also agree that copper may be poised for a significant rebound in some timeframe, depending largely on future Chinese investment in infrastructure and the completion of the deleveraging process in the capital markets.

See here the beating that Dr. Copper has taken in recent months:
http://www.kitconet.com/charts/metals/base/spot-copper-5y-Large.gif
http://www.kitconet.com/charts/metals/base/lme-warehouse-copper-5y-Large.gif

However I'm loathe to increase my position in the Southern Copper at this time. Why? Because the opportunity cost is too high. Nobody will dispute that the fundimentals of copper are impaired in the short term. These fundimentals may or may not be impaired in the medium term too, and I will freely admit that I'm not smart enough to make a reliable judgement call on that. The bottom line is that the risk factors for PCU are tied directly to the duration of this economic downturn, and the extent that it will impact future copper consumption.

The opportunity cost of buying PCU is too high at this time because other companies exist whose fundimentals have suffered no impact from the prevailing economic conditions but whose stock prices have been beaten down as much or more than Southern Copper. Sinoenergry (SNEN) and China Natural Gas (CHNG.ob) are my two favored champions and are prime examples of such companies whose cash flow have not suffered through the economic crisis. (Although they are by no means the only examples!) Within the past month, both companies have reiterated 2009 earning projections. China Natural Gas even went so far as to raise 2008 year end guidance in their 3rd quarter financial results. Both companies have adequate cash reserves and cashflow to finance their respective expansion plans for the forseeable future.

Unlike PCU, the prevailing economic conditions and absence of cheap capital can serve as a silent ally to companies positioned as CHNG and SNEN are, as it will choke out the sprouting potential startup rivals at this critical juncture, which may allow them to take over the entire garden in these emerging industries with minimal competition. The critical difference is that some companies are harmed by the present economic conditions while others such as those with established cash flow and financing may stand to indirectly benefit from them.

For these reasons, I qualify my agreement with TMFSinchiruna that Southern Copper is a bargain at this price, but considering some of the other irrationalities of the present market, one can and should do even better.