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3 Things to Watch With Southern Copper

Sean Williams
August 14, 2012

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