PCU or Southern Copper Company Yields Greater than 8%

High in the Andes Mountains of Peru and in parts of Mexico too, the Southern Copper Company, symbol: PCU, mines for Copper, Zinc and Silver, along with Gold, Coal and other minerals. Back on the New York Stock Exchange, it's ADR shares offer an outsized yield of more than 8 percent that appears almost TGTBT (or "To Good To Be True") at first glance. Since 2003, it's up from 25 to near 100 today, and trades at a P/E ratio ranging from 7 to 11 over the last year and currently sits below 8, which is well below its peer group of dirt diggers.

PCU has had a run up, which mirrors the motion of its gross annual margins and net annual revenues, measures that have spiked with the demand and price of copper over the last three years. It's gotten enough attention from the financial media, and from other, more critical outlets. So its not exactly a big secret.

Nonetheless, currently PCU trades below it's 50 day moving average but above it's 200 day average, which suggests a good place to plough in. It's net margins at 36%, are among the highest in the industry, topping the industry's biggest player measured by market capitalization, BHP Billiton, which enjoys a net margin of 27% and a P/E of 14, as well as, Freeport Mac's 29% net margin, with it's P/E of 9.


PCU's EBITD Margin (near 50%) and Earnings Yield (near 40%) verses its Revenue growth (near 50%) are above average, and look good next to its peers, which included these symbols-- RIO, EZM, TCK, RTP, ACH, and FCX. But it really shines where its profit margins outpace their five year average, showing great profitablity vs. its peers. PCU has moderate debt (near 35% to 40%) vs. its peer group; but a Return on Equity of more than 50%, which tops most of its class.

Television personality Crammer, has pumped the stock under is Booyahboy brand, and today, options expert and guru, A Bernie Schaffer reporter issued a green light on PCU under its "contrarian takeaway" series in Investor's Business Daily. On 9/11, 2006, Reuters upgraded it, as did Marketedge earlier on 9/5 and Thomson Financial in late August.

The general thinking here is that China is going to be entering the market to buy more Copper, which is consistent with the popular investment theme of capturing the eye popping demand from any or all of the big four BRIC countries (Brazil, Russia, India, and China) that sharpies are talking up at places like Goldman Sachs. The demand there appears strong, and will be so for the forseeable future, as economies in China and the rest leap frog to first world levels of production, and Biggy sized Burgers, Fries and Colas, a laptop and maybe car for everyone.

How safe is the yield on this copper, gold, silver, zinc mining machine? It's a good question, and something keep an eye upon (along with estimates and headlines from China's about the demand for Copper). Of course, if you don't want to review orders for copper on a regular basis (and who wouldn't?), placing a stop loss order under your purchase price could help you sleep a little better at night, if you were to park the money in it. There are also active calls and puts on PCU, which is to say you can buy or sell a little downside protection if you'd like to spend the time sorting through options tables on PUC to find a series that fits. The Jan 100 calls, for example will pay you 4.30 ($430) to write on ever 100 shares. So there you have a greater yield, and protection in the event of a decline in PCU's shares by Jan 2007.

In conclusion, you have a copper company, selling its products to the big BRIC countries, that's trading below it's lower bollenger band, that's yielding more than 8% (Schaffer's reported 10%, but I don't see it), and that has calls that will pay you a nice bit more to wait til January. The dividend is not a the nature of a REIT, and so it's not disqualifited for favorable tax treatment. Sounds TGTBT? We'll it's copper, not Enron.

So let's role play-- what am I goig to say if a guy rings me on my phone and says, "hey, I just bought 100 of this PCU toilet paper, and wrote one Jan 2006 95 call for 6. That means I get more than 8% yield (or about 700 dollars per yea from the companyr), and another $600 dollars from the options exchange, next year after the Holidays (which is taxed next year, at a qualified dividend rate of 15%), which also amounts to downside protection to the 83 level, where I can set a stop loss order? Who'se better than me?" What can I say? I'm going to tell him, Tiger Woods is better than you, but he has to practice. Nice trades, maybe.