Still Shining on Southern Copper

We think Southern Copper Corporation (PCU - Snapshot Report) is in a very good position to expand production amidst higher-grade ores at its mines. The company has undertaken various exploration projects, which will enhance its production capacity. This, and in conjunction with high copper prices, provides a favorable backdrop for revenue. Based on these positive fundamental factors, we reiterate our Buy rating on shares of PCU with a six-month target price of $115.00.

Increased consumption in China will keep copper prices at an elevated level, which will flow into the net income of Southern Copper. PCU’s projects in Peru are expected to increase the total copper production capacity by 270,000 tons per year by 2011. Healthy cash generation will support shareholder value creating measures and investment in the company’s growth projects.

At present, the company focuses on lowering costs. The management had previously mentioned the possibility of a partial integration of PCU with another mining company for shareholder wealth maximization. To be more cost-effective, PCU plans to set up a 600-megawatt power plant by 2011 in Mexico, which will help control the cost of energy. Further, the company’s debt level is low.

Currently, shares of Southern Copper Corporation are trading at 11.2x our 2008 EPS estimate of $9.03, almost in line with the industry median multiple. The company fundamentals remain strong and the stock pays an attractive dividend yield of 6.7%. We believe that as the copper prices are significantly strong it will improve the top line.

Thus, applying a P/E multiple of around 12.7x to our 2008 EPS estimate of $9.03, we arrive at a target price of $115.00. We remain bullish about the stock in the near future and maintain our Buy rating.

Read the full analyst report on PCU