How Does 8% Yield from China's Growth Sound?

It's well known and more or less a good thing that China buys United States Treasury bills, notes and bonds, along with their Marlboros (Symbol: MO). But among the other things that China is buying hand over fist right now, is copper. And Southern Copper Company (Symbol: PCU) yields more than 8%, by selling copper where it's needed most.

High in the Andes Mountains of Peru and in parts of Mexico too, PCU mines it, along with Zinc and Silver, with Gold, Coal and other elements. While back on the New York Stock Exchange, PCU's American Depository Shares offer an outsized yield of more than 8 percent that, at first glance, may appear TGTBT (or "To Good To Be True," which is Theyieldhoe.com's catchy catch phrase and underlying theme). Since 2003, PCU is up from 25 to nearly 95 today, and has traded at a P/E ratio ranging from 7 to 11 over the last year. It's current price per earning per share is less than 8, which is well below its peer group of mining companies making hay out of copper.

PCU has had a run up, which mirrored the motion of the company's gross annual margins and net annual revenues, measures that have spiked with the demand and price of copper over the last three years. It's gotten enough attention from the financial media, and from other, more critical outlets, including a Frontline report on environmental and political conflicts the company faces in Peru. So its operations and its success is not exactly a big secret.

Nonetheless, currently PCU trades below it's 50 day moving average but just above it's 200 day average, suggesting a good place to plough in. It's net margins at 36%, are among the highest in the industry, topping the industry's biggest player measured by market capitalization, BHP Billiton, which enjoys a net margin of 27% and a P/E of 14, as well as, Freeport Mac's 29% net margin, with it's P/E of 9.

PCU's EBITD Margin (near 50%) and Earnings Yield (near 40%) verses its Revenue growth (near 50%) are above average, and look good next to its peers, which included this short list-- RIO, EZM, TCK, RTP, ACH, and FCX. But it really shines where its profit margins outpace their five year average, showing great profitablity versus its peers. PCU has moderate debt (near 35% to 40%) vs. its peer group; but a Return on Equity of more than 50%, which tops most of its class.

None of this has exactly escaped those who get paid to pick Wall Street's winners. Blurting Cable Television personality Cramer, has pumped the stock under his Booyahboy brand several times, and today, a Bernie Schaffer website reporter issued a green light on PCU under its "Contrarian Takeaway" series in Investor's Business Daily, which is generally advice to zig when everyone elses is zagging. On 9/11, 2006, Reuters upgraded it, as did Marketedge earlier on 9/5 and Thomson Financial in late August.

The general thinking here is that China is going to be entering the market to buy more Copper, which is consistent with the popular investment theme of capturing the eye popping demand from any or all of the big four BRIC countries (Brazil, Russia, India, and China) that sharpies are talking up at places like Goldman Sachs and Morgan Stanley. The demand in BRIC countries appears strong, and will be so for the forseeable future, as long as these economies strive to leap frog to first world levels of production and consumption, with Biggy sized Burgers, Fries and Colas for everyone.

How safe is the yield on this copper, gold, silver, zinc mining machine? It's a good question, and something keep an eye upon (along with headlines from China's about the demand for Copper). Of course, if you were to park the money in PCU but have doubts about your ability to review orders and flow of copper to the east on a regular basis (or you don't trade copper in Chicago, and do not read such reports before you take your coffee each morning), you may want to consider using trading tricks to avoid big mistakes. One way to protect yourself is by placing a stop loss orders under your purchase price, which could help you sleep a little better at night.

Another way to avoid loss could be to use options on PCU shares, as there are also active calls and puts on PCU. This means you can buy or sell a little downside protection if you'd like to spend the time sorting through options tables on PUC to find a series that fits. Selling calls pays you. Buying puts, costs you. For example, the Jan 100 calls, will pay you 4.30 ($430) to write on every 100 shares; and the Jan 95 can harvest you 6 (or $600 for every 100 shares you have). Writing calls on PCU offers you a greater yield, and protection in the event of a decline in PCU's shares by Jan 2007. Buying puts also offers PCU share owners a way to lock in their share price, and avoid loss, albeit with a price that will cut PCU's massive yield down to size.

In conclusion, you have a copper company, selling its products to the big BRIC countries, that's trading below it's lower bollenger band, yielding more than 8% (Schaffer's reported 10%, but I don't see it), and that has calls that will pay you a nice bit more to wait til January (next tax season). The dividend is not a the nature of a REIT, and so it's not disqualifited for favorable tax treatment of just 15%. Sounds TGTBT? We'll it's copper, not Enron, and it may be worth a look see, as they say.

So let's role play-- what am I goig to say if a guy rings me on my phone and says, "hey, Yield Hoe, I just bought 100 of this PCU toilet paper, and wrote one Jan 2006 95 call for 6. That means I get more than 8% yield (or about 4700 clams per year from the companyr), and another $600 clams from the options exchange, next year after the Holidays (which is taxed next year, at a qualified dividend rate of 15%), and which amounts to downside protection to the 83 level, where I can set a stop loss order if she shits the bed? Who'se better than me?"

What can I say? I'm going to tell him the truth: "Hey, sap, Tiger Woods is better than you, but he has to practice, so hey, maybe you know what you are doing after all; just make sure you bet with your head, not over it."