Monday October 10, 2011
by Keith Fitz-Gerald, editor Money Morning
I love to find a sound business whose stock price has been pummeled in the uncertain markets. It screams bargain and is a major buying opportunity.
Southern Copper (SCCO) is a company to get genuinely excited about; it has world-class assets and high profit potential, but its share price has taken a dive.
And in this case, the fact that Southern Copper's stock price has dropped means its already-juicy dividend has increased. Currently the company's $2.48 dividend equates to a 9.5% yield.
Plus, it's consistent: Over the last five years, Southern Copper has averaged a payout of 83% of its after-tax profits.
Given all that, it's time to buy this high-yielding, high-quality mining company. It has the largest copper reserves of any publicly traded company, and last year mined more than 1 billion tons of copper.
That means it is perfectly positioned to profit from increasing global demand for copper.
The company operates the Toquepala and Cuajone mines in the Andes Mountains located southeast of Lima, Peru, as well as a smelter and refinery in the coastal city of Ilo, Peru.
It also operates underground mines that produce zinc, gold, and lead, as well as a coal mine that produces coal and coke.
Southern Copper's mines are estimated to have a productive life of about 80 years. That means 80 years of revenue from copper, gold and silver deposits.
The company's cash operating cost is $1.61 per pound to produce copper, but that cost is lowered to 31 cents per pound by subtracting profits from the mines' byproducts of gold, silver, lead, zinc and coal. That's a lot of secondary profits hitting the bottom line.
Southern Copper Corp. is a subsidiary of Americas Mining Corp. Its stock is 80% controlled by the parent company Grupo Mexico S.A. de C.V., with the public markets owning the other 20%.
This relationship is beneficial because Southern Copper is protected by one of the largest companies in the world.
However, this structure has a potential downside: Investors in Southern Copper Corp. could be bought out at some point.
The parent division has made an offer to relist the merged divisions, which would include replacing the current shares with newly-listed shares and a slightly different share count.
Normally, I shy away from companies with open corporate actions in front of the board of directors.
In this case, however, I am willing to look past the possible changes because of the quality assets and profit potential Southern Copper has to offer.
The company reported second-quarter net income of $658 million, 110% higher than 2010's second quarter. Sales were up 54% to $1.8 million.
The company has a market cap of $26 billion with an enterprise value of $28 billion once net debt and cash is accounted for. Its price/earnings (P/E) ratio is 10.73.
Learn more about this financial newsletter at Keith Fitz-Gerald's Money Morning.