Conducting Long-Term Growth at Southern Copper

Say "molybdenum" 10 times fast. Now, if you want to profit from it, say "Southern Copper."

Southern Copper (NYSE: PCU  ) delivered a modest increase in earnings of 2.4% over the first quarter of 2007, with a net of $565 million, or $1.92 per share. More importantly, the results established a clear reversal -- an 81.7% increase, in fact -- from the previous quarter, in which weaker copper prices and labor stoppages sent earnings, and the share price, tumbling dramatically.

Also impressive: the 10.4% increase in sales, despite a 26% decline in copper production from the year-ago period. Factors contributing to this success included the 30% increase in average copper prices and a 28% rise for molybdenum, whose production also rose. Maintenance work crimped copper production, as did the continued labor issues at the company's Cananea project in Mexico.

In an apparent effort to prevent a repeat of the dismal quarterly results that closed out 2007, Southern Copper entered into derivative contracts covering 30% of projected copper output for 2008. Though the move places the company on the conservative end of the spectrum compared with rivals Freeport-McMoRan (NYSE: FCX  ) and Teck Cominco (NYSE: TCK  ) , the terms of the contracts appear fairly favorable. The contracts have an average floor price of $3.40 per pound, and a ceiling of $4.23, while copper currently trades at about $3.90. Investors will be wise to watch copper prices carefully. If the metal has another parabolic run, as it has in recent years, these contracts could be a drag for 2008 results.

Meanwhile, Southern Copper is on extremely sound financial footing. With credit markets experiencing unprecedented tightness, cash on the books is an investor's best friend, and Southern Copper has plenty of it. Its strong balance sheet will be worth its weight in copper when the company moves forward with its $2.1 billion capital investment plan to increase output by 39% for 2011.

With a P/E around 15 and a dividend yield of 4.8%, Southern Copper remains an intriguing opportunity for a producer of commodities as hot as copper and molybdenum. Though the derivative contracts might prove an expensive insurance policy, the company's long-term growth outlook is strong enough to beg this Fool's forgiveness.

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