Two Strikes Against a Beloved Copper Miner

With copper generating excitement as prices stabilize from their worst levels of 2008, one would expect copper investors to breathe a sigh of relief.

Southern Copper (NYSE: PCU  ) investors, however, may be too stunned to breathe at the moment. Last week, the company announced it will close the Cananea mine in Mexico due to damage caused by workers who have been on strike since 2007. Southern Copper offered no timeline for reopening the operation, which once produced 450 tonnes of copper per day, but announced its intention to fire the laborers pending the approval of the Mexican government. Labor struggles are nothing new in Cananea, where the old municipal jail is a museum commemorating a major strike at the same mine in 1906. The move to fire the miners appears to risk rekindling a tradition of protest and distrust of the company (generic) … even though the mine has changed hands from a century ago. Investors would be wise to keep an eye out for potential backlash in the form of ramped-up protests.

Meanwhile, in the courts of Mexico's big brother to the north, last week brought a crippling decision against Southern Copper's majority stakeholder, Grupo Mexico. The U.S. federal court ordered Grupo Mexico to return 260 million shares of Southern Copper -- or about 30% of shares outstanding -- to the bankruptcy estate of its own former subsidiary: Asarco.

The ruling found that the transfer of shares out of the group's failing subsidiary had harmed Asarco's creditors, and included damages of $1.9 billion for lost dividends plus interest. For now, it appears that this block of Southern Copper shares will remain locked up in the bankruptcy estate, but eventual liquidation by creditors or sale to a third party could create the potential for market-making moves in a stock with only 20% of outstanding shares held by entities outside of Grupo Mexico. Prompting nary a chuckle, Moody's downgraded Southern Copper's credit rating on April Fool's Day.

I see no need for long-term investors to be spooked by Southern Copper, but quality alternatives abound. Freeport-McMoRan (NYSE: FCX  ) offers a golden bonus, BHP Billiton (NYSE: BHP  ) includes a basket of commodities, and Taseko Mines (AMEX: TGB  ) presents an alluring growth opportunity. Southern Copper's massive cash moat, however, makes shares far more attractive than debt-ridden rivals like Rio Tinto (NYSE: RTP  ) and Teck Cominco (NYSE: TCK  ) , so even with last week's unwelcome developments, Southern Copper will still be standing strong once investors have caught their breath.

Further Foolishness:

With more than 4,000 recommendations from our talented community of investors, including 1,000 All-Stars, five-star miner Southern Copper has been a popular choice among CAPS members for quite a while. Why not share your own thoughts with the growing community of Fools?

Fool contributor Christopher Barker is the commodore of copper. He can be found blogging actively and acting Foolishly in the CAPS community under the user name TMFSinchiruna. He owns shares of BHP Billiton, Freeport-McMoRan, Taseko Mines, and Teck Cominco. The Motley Fool has a non-malleable disclosure policy.


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  • Report this Comment On April 07, 2009, at 9:39 AM, lemoneater wrote:

    Thank you for this helpful analysis on PCU. It is good to have a sense of perspective on bad news. I'm encouraged that you believe PCU will gain ground again. I'm long PCU.

  • Report this Comment On April 07, 2009, at 10:01 AM, dudemonkey wrote:

    This is the kind of article I like to read on TMF. Good, quality information without speculation or wild spin. Your assessment of the situation is good to hear and confirms my own thinking. I'm long PCU and I'm thinking of diversifying my copper holdings with another miner although if PCU gets beat down hard by this I may snap up some shares while they're out of favor.

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