Warren Buffett attracts a lot of attention. As the world's third-richest person and most celebrated investor, thousands try to glean what they can from his thinking processes and track his investments.
While we can't know for sure whether Buffett is about to buy Southern Copper
In his most recent 10-K, Buffett lays out the qualities he looks for in an investment. In addition to adequate size, proven management, and a reasonable valuation, he demands:
- Consistent earnings power.
- Good returns on equity with limited or no debt.
- Management in place.
- Simple, non-techno-mumbo-jumbo businesses.
Does Southern Copper meet Buffett's standards?
1. Earnings power
Buffett is famous for betting on a sure thing. For that reason, he likes to see companies with demonstrated earnings stability.
Let's examine Southern Copper's earnings and free cash flow:
Source: Capital IQ, a division of Standard & Poor's. Free cash flow is adjusted based on author's calculations.
Southern Copper's earnings have fluctuated over the past five years with the state of the global economy, but the company has managed to remain solidly profitable for more than 15 years.
2. Return on equity and debt
Return on equity is a great metric for measuring both management's effectiveness and the strength of a company's competitive advantage or disadvantage -- a classic Buffett consideration. When considering return on equity, it's important to make sure a company doesn't have an enormous debt burden, because that will skew your calculations and make the company look much more efficient than it actually is.
Since competitive strength is a comparison between peers, and various industries have different levels of profitability and require different levels of debt, it helps to use an industry context.
|
Company |
Debt-to-Equity |
Return on Equity (LTM) |
Return on Equity |
|---|---|---|---|
| Southern Copper | 68% | 51% | 44% |
|
Freeport-McMoRan |
21% | 48% | 21% |
|
Teck Resources |
28% | 12% | 21% |
|
Newmont Mining |
25% | 21% | 12% |
Source: Capital IQ, a division of Standard & Poor's.
Over the past five years, Southern Copper has generated an outrageously high return on equity while employing moderate amounts of debt.
3. Management
CEO Oscar Rocha has been at the job since 2004. Prior to that, he was the company's COO and has held senior positions at Mexicana De Cobre and Mexicana De Cananea, two other mining companies.
4. Business
Copper mining isn't particularly susceptible to wholesale technological disruption, though it can be cyclical and highly subject to commodity price movements.
The Foolish conclusion
Whether or not Buffett would buy shares of Southern Copper, we've learned that, despite operating in a commodity industry, it exhibits many of the characteristics of a quintessential Buffett investment: consistent earnings, high returns on equity with limited debt, tenured management, and a straightforward business.
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