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Published: October 13, 2010
I feel the same way about gold right now as I did about tech
stocks in the late 1990s -- that it's far too late to get in.
Just the fact that no one can agree if there's a gold bubble is
enough to turn me off to the yellow metal. You may recall that a
similar debate raged about tech stocks right up until that
bubble popped.
If you're thinking of buying gold, consider holding off until
you can be reasonably certain of its merit -- which could be a
long time. At least be cautious by building a position
gradually, for example, or using out-of-the-money call options
as The Wall Street Journal recently advised. (Interestingly, the
article containing that advice also argued against a gold
bubble.)
Look to other metals
Better yet, invest in some other metal. The one I'm thinking of
is far more versatile, having many industrial uses, and it's not
on everyone's radar like gold. Whereas gold may be nothing but
dangerous going forward, this other metal has the potential to
earn you +10% a year or more for the next several years.
That's largely because demand for it is expected to continue
rising quickly in emerging markets such as India, Indonesia,
Peru and particularly China. These growing nations will need
millions of tons of the metal for electrical wiring, industrial
machinery, ship building, computers, pipes and many other
applications.
The metal, as you may have guessed, is copper.
To get the kind of return I mentioned, consider investing in
Southern Copper (NYSE: SCCO), a $31 billion mining operation
with facilities in Chile, Mexico and Peru. While the company is
obviously in the copper business, its mining operations also
yield other valuable metals including silver, zinc and
molybdenum.
At the current price of about $38, the stock is close to its
one-year high and may not run up again for a while. A pullback
seems more likely at this point.
However, the stock should reward investors well during the next
three or four years as copper production is increased to meet
Asian demand. I anticipate returns of at least +10% annually
including dividends, which, incidentally, few other copper
miners provide in any meaningful way. Southern Copper's 3.7%
current yield is six times the 0.6% that competitor
Freeport-McMoRan (NYSE: FCX) pays, and twelve times the
industry average of 0.3%.
The case for attractive returns
Two important developments at Southern Copper have set the stage
for its stock to deliver strong long-term returns. First,
operations recently resumed at the company's Cananea, Mexico
mine, which had been essentially out of commission for two years
because of labor disputes. The mine holds 60% of the company's
copper reserves.
Second, the company recently approved a five-year, $3.8 billion
expansion program at Cananea. The aim is to more than double
copper production there from 180,000 tons to 450,000 tons
annually. A $1.8 billion expansion program already underway at
the company's mine in Peru, and is expected to add another
292,000 tons annually.
That puts Southern Copper on track to grow
earnings by about
+16% per year, on average, for at least a few years, with an
increase of +25% to +30% forecasted for 2011. The company's net
profit margin will likely jump into the 35% range from about 29%
now, and it should be able to maintain a
dividend yield close to
4%.
Action to Take -->
Considering the recent run-up, it also seems reasonable to wait
for Southern Copper to pull back some before buying. Of course,
that sort of
market timing can be hazardous because the stock might
resume its advance, with the price quickly rising to the point
that it's no longer a good value.
So by all means, buy Southern Copper now. With a forward P/E of
about 14, it's still a good value despite the recent run-up in
price. Furthermore, I consider a total return estimate of +10%
per year to be on the conservative side. The stock is capable of
delivering as much as +15% annually, which translates to a +75%
gain between now and 2015.
-- Tim Begany
Contributor
StreetAuthority
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