According to Citi, PCU fits their current recommended profile of low cost miners with strong balance sheets. They had listed PCU as a Sell with copper at $3.75/lb given huge downside potential.
This scenario has unfolded ($1.85 copper, PCU down 74% from peak) and upside now outweighs downside.
5 reasons to buy:
#1: The Worst Is Over For Copper — Industry studies suggest that $1.70/lb is the 90th percentile on the copper cost curve, i.e. less than 10% below current prices. This is where copper has settled during previous global recessions.
#2: Structural Shortages Not Resolved — Copper is Citi's preferred base metal given structural supply constraints. The price was $4/lb only six months ago.
#3: High Quality Assets + Good Balance Sheet — PCU has the lowest cost mines and the highest reported reserves of any major copper producer. The company has almost zero net debt with over $1.1b in cash.
#4: Buy Ahead of Strike Settlement, Not After — They cannot predict a timetable for ending the painful strike at PCU’s Cananea mine. Yet, this will eventually boost annualized EPS by 40%+ and is a positive catalyst in waiting.
#5: Low Valuation — PCU trades at 11x 2009 on “trough” copper and strikelimited production. Valuation is 5-7x on estimated mid-cycle EPS of $1.50-2.00, below fair value of 10-12x.
Notablecalls: I'm calling this one Actionable here below $13-$14 level
This call has it all:
- Beaten down stock, yet not your average inst. favorite.
- Low valuation (5-7x on estimated mid-cycle EPS)
- Catalyst ahead (Strike Settlement)
Will trade closer to $14-$15 level today.
PS: Goldman reits their Sell on PCU this morning:
We reiterate our Sell rating and $11 per share 12-month target price on Southern Copper. We have lowered our 2008-2010 EPS to $1.91, $0.68 and $1.12 per share from $1.95, $0.70 and $1.15, respectively to account for 3Q08 results, lowered production in 4Q08 and an increased cost structure despite expectations for an increase in sulfuric acid long term contracts, as power costs in Peru are not expected to abate until 2010. We believe that continued labor unrest in Mexico, softening copper and molybdenum prices and power costs will cap PCU’s stock performance in the near term in spite of the company’s high dividend yield (~5.0%).
NC: This will likley act as a drag. - so you know it's out there.