3 Things to Watch With Southern Copper

Southern Copper (NYSE: SCCO  ) is one of the world's largest copper producers; as of December 2011, it possessed the world's largest copper reserves at 146 billion pounds. The company also mines molybdenum and zinc, but these metals account for only a fraction of total revenue.

Today, let's look at three things investors should be watching regarding Southern Copper, as they will provide us better insight into the company.

1. China demand
Obviously, as the world's leading company for copper reserves, the price of copper is the most important factor in determining profitability and value. However, it isn't just enough to follow just the price of copper -- we need to know the source behind its rise and fall -- and that reason falls squarely on the lap of China.

China is the world's largest importer of copper and thus has a lot of say in determining the supply, demand, and price of the metal. Copper's uses in electrical circuitry for televisions, PCs, and mobile phones, as well as its uses in construction, are providing the boom that has allowed China to grow its GDP at an average of 10% per year since 1980.

Therefore, the health of China is imperative to copper miners. Lately, things haven't been too rosy. With China's GDP growth slowing to a three-year low, we've witnessed steady operational declines in copper sales from Freeport-McMoRan Copper & Gold (NYSE: FCX  ) , which sold 927 million pounds of copper last quarter, down from 1 billion a year ago. Also, Rio Tinto (NYSE: RIO  ) suffered through a 22.4% decline in copper revenue due to lower shipments and 14% weaker pricing through the first six months of the year. Southern Copper was able to buck this trend and, despite a drop in revenue, moved 10% more copper than in the year-ago quarter. In short, keep your eye on China!

2. Know your competitors
If rule No. 1 is know what China is doing, then rule No. 2 has to be: Know what your competitors are doing. There is no shortage of copper mines being built, as well as investments in improving yields by Southern Copper's peers.

Small-cap miner Thompson Creek Metals (NYSE: TC  ) , which has been primarily a molybdenum play, is on track to open Mt. Milligan, a copper mine it acquired in 2010 that has 2.1 billion pounds of copper reserves, by late 2013. HudBay Minerals just last week approved a $1.5 billion investment in the build-out of the Constancia copper mine in Peru. The deal partnered them up with Silver Wheaton (NYSE: SLW  ) and, through a production-sharing process, gives HudBay $750 million in upfront working capital and Silver Wheaton an additional stream of revenue. On the larger front, companies like Rio Tinto have capital expenditure budgets totaling $16 billion for 2012, with more than $3 billion of that going to its copper production.

Southern Copper is no slouch either. According to comments made during its latest conference call, management expects capital expenditures to total $1.6 billion in 2013 as it remains on track to expand its Toquepala and Cuajone mines in order to double output by 2015.

3. Watch that payout
The final factor worth keeping an eye on that has Southern Copper on many income investors' radars has to be its aggressive history of quarterly payouts. Unfortunately, investors are sometimes driven more by their love for a high yield than through actual research, so it pays to keep up on the previous two factors, because they'll help determine what sort of quarterly reward you'll be receiving as a shareholder.

Over the past five years, there have been numerous instances where Southern Copper's payout ratio has exceeded, or been right up against, its total yearly earnings. That's great for shareholders who are living in the moment and receiving that stipend, but it's a bad omen for future dividend growth. With its dividend payout done on a quarterly basis (i.e. there's no such thing as a regular quarterly payout), you have to avoid being taken in by trailing yields -- and I can't emphasize that enough. Southern Copper's trailing yield is over 6%, but it's highly unlikely that it'll be paying out that much in dividends this year with China's demand for copper slowing.

Temper your yield expectations and keep your eye on its payout ratio for clues as to whether its payout may head higher or lower.

Foolish roundup
Now that you know what to watch for, it should be easier to analyze Southern Copper's successes and pitfalls in the future and hopefully give you a competitive investing edge.

If you're still craving even more info on Southern Copper, I would recommend adding the stock to your free and personalized watchlist so you can keep up on all of the latest news with the company.

Keep in mind that with most precious and non-precious metals still near their decade-long highs, Southern Copper isn't the only miner standing to benefit. Our analysts at Stock Advisor have identified a small miner that could be sitting on a fortune and whose stock price could catapult significantly higher in the coming years. Find out which miner has our analysts so excited by clicking here to get your free special report.

Fool contributor Sean Williams owns shares of Thompson Creek Metals but has no material interest in any other companies mentioned in this article. You can follow him on Motley Fool CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy that I'm sure you'll dig.


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  • Report this Comment On August 14, 2012, at 10:51 PM, MHedgeFundTrader wrote:

    One of the great things about running a website with a truly global reach is that readers send me material which is nothing less than outrageous. So I had to laugh when I found in my inbox an animation of two bears discussing the hopelessly idiotic approach the US government has taken towards its trade with China over the past two decades.

    America gave away 25 million jobs, got nothing in return, with the end result that our standard of living is falling, while China’s is rising. The Chinese made this easy by devaluing their currency 50%, thus giving their exporters an unassailable price advantage. This has enabled the Middle Kingdom to buy an increasingly larger part of the US every year at knock down prices.

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