Copper: Big boys ain't buying it

Check out PCU's six month chart.

Anybody wanna tell me why PCU was at $35 and $36 with copper down at $2.70/lb, and $3/lb but now we're marking $3.30/lb copper PCU is trading $32 and $33?

Suggestion: This copper move is utter bullshit end-of-year pumperooney at the hands of the past masters of market manip, people that put the Comex to shame. You know them as the floor traders of the London Metal Exchange. Meanwhile, the big boy players who run their squillions in copper producers are quietly exiting on strength.

Charts of the day are...........

......three charts that compare Southern Copper (PCU), Freeport McMoRan (FCX) and the Philadelphia Gold and Silver Sector Index(XAU). First here's the ten day chart, and the recovery in all three is clearly marked.

Then we have this one that shows the 12 month evolution. This one suggests that FCX is the place to be as it's the most beaten up of the three.

You'd have thought that FCX, with its copper-plus-gold product mix, would have survived the last few months better than the heavily copper (and moly, with some minor credits) PCU, but that ain't necessarily so, Joe.

Finally the long five year view. This one shows that owning gold stocks from late 2003 to late 2008 has been (dare I say this out loud?) a zero sum game.

It also shows just how high PCU flew after it had been discovered by the market.

So what's the bottom line here? Well draw your own conclusions, but I think there are several things to take away from this chart study. Here are just four of them:

• PCU compared to the others on the long term chart shows the value in picking good stocks at the right time. It also shows how even the best can fall back if the underlying market sucks.

• The one year chart shows how gold stocks have held up better than base metals stocks. This stands to reason and is part of the 'preservation of capital' drum I've beaten ever since this blog started in March.

• The 10 day chart shows that the breath of life is being blown into all miners, not just the goldies.

• But maybe the most important thing to note is how you can favour XAU, then PCU, then FCX just by changing the timescale of your chart. A great example of the biggest trap in charting. This is the thing that puts me off blowhards that say charts are the way the truth and the light. Charts are like statistics; if desired, you can pick and choose the one you want to make your preconceived point. The charts don't lie, but the people who write words around them certainly do. This is why I call TA (mostly) mumbojumbo and this is why a good chart-reader is as skilled as a good fundamental analyst (and also just as rare).

Chart of the day is............

....this FCX / PCU ratio chart from yesterday's post (linked right here).

This because I had a lot of feedback about the post and its implications. It seems there are other market wonks out there who, like your junkie Otto, can't pull themselves away from the market on the day of rest.

Gold is doing nicely this morning and the base metals recovering a couple of ticks, too. Makes for a brighter scenario than late last week, for sure. Will the Obama plan put the dollar under pressure? Hmmm...quite possible...let's see how it pans out.

As a recap and for the record (as somebody asked in the morning mailbag), I'm long JAG and DMM.to right now with the rest in cash. Both those stock positions are fairly small. I'm looking to add DMM.to on weakness. But frankly, you shouldn't be following me around like a sheep trying to trade what I trade. DYODD, dude...chances are you're much a much better market timer than I am.

Comparing PCU, FCX and Copper shows the value FCX offers at present

Here are a series of five charts (click on any of them to enlarge if needed) which give food for thought in the copper sector and, in my personal view at least, give plenty of reason to like Freeport McMoRan (FCX) right now. The first chart is the share price evolution of Southern Copper (PCU) . As anyone who follows the sector knows, the price has been beaten to merry hell.

But if we look at PCU in ratio with the price of copper (in US cents), we can see the effect that lower spot prices have had on the stock.

But before we launch into an analysis, let's look at the second pair of charts. The charts below do the same for Freeport McMoRan, first with the straight stock price and second the equal ratio to spot copper.

That's a big difference. For one reason or another, PCU has held up much better against the drop than FCX. To drive the point home here's the last chart that ratios FCX to PCU:

For nigh on two years, PCU and FCX have (in general terms) stayed lockstep with each other, but that's not true any more. Even though PCU has been hit hard by the downturn, FCX has been hit harder still. There are plenty of reasons to point to here, for example;

• The sudden disappearance of the potential for FCX being bought out by peers.

• FCX's more aggressive expansion program now being curtailed

• lower operating margins at FCX (last qtr around 37% for FCX and 50% for PCU)

• PCU's tight ownership and dividend policy encourages long-term holding, while FCX is comparatively more a hedge fund/trade vehicle

• etc

But the big question is; which is the better bet right now? I have to say that although FCX is likely to take a $1bn hit on operating cash flow in 4q08 compared to 3q08 and is carrying $7.2Bn in debt (slightly offset by $1.2Bn in cash), it has been oversold and looks like great value to rebound from here. Here's another list:

• Copper cash cost net of by products was $1.21/lb and $1.29/lb in the last two quarters; this suggests that FCX will continue as a cash flow positive operation at current prices.

• Also it will certainly benefit from lower costs going forward. The drop in fuel costs doesn't need underlining here, but sulphuric acid prices have dropped from the stratosphere recently and will be also be a weight off the opex. A host of other examples available, from steel prices to transport costs to truck tires to payroll

• FCX has slashed its 2009 capex budget from U$2.3Bn to U$1.1Bn.

• Last week's announcement that hit the stock so hard has got all the bad news out of the way. As noted here a couple of days ago, the panic shills have now sold their losing positions and the whole stock has the smell of capitulation around it.

• Management are no fools. They know the picture going forward and have adjusted accordingly. This company is not going bust, it's getting leaner and meaner so suit the circumstances in which it finds itself.

• Although 70% of FCX revenues come from copper and moly, approx 30% comes from gold. Gold has weathered the downturn better than any other traded metal and will provide significant backbone to the company's 2009 results.

• Copper will bottom at some point and (to tempt fate somewhat) it already looks oversold. $1.38/lb is the kind of price that will close mines and less efficient operations than FCX all over the world. The immediate effect remains to be seen, but you can bet your last cent that nearly all world copper mine projects that were moving towards production will be deferred indefinitely until prices pick up.
  

• etc

So without going into the numerical details in any great extent in this post (DYODD, dude. Maybe starting with FCX's 3q08 results PR might be a good idea though), this humble scribe sees plenty to like about FCX at these prices. It's obvious that the company won't continue making the kind of money it's made recently, but it's being priced as a chapter 11 candidate right now and that's most certainly not the case. So the advice is the same as the post earlier in the week; wait a couple of days until the stock has settled down a bit (there are still lemmings puking, I'd wager) and look for a nice price once it and spot copper look more stable. As a final thought, for those who like to hedge investments the "long FCX short PCU" pair trade looks like the right sort of set up from here.

The Twobreakfasts Modus Operandi

García spots the breakfast waitress in the crowd

Why M.O.? Because it's as close as dammit to criminal. This is how the slob works:

First note this report of Southern Copper (PCU) and its 3q08 conference call on October 28th, when PCU head honchos specifically said that the Tia Maria copper project was on track, would be built, there were no delays, they'd already invested $569m of the approx $1Bn total estimated capex etc etc. A couple of choice quotes from the CC about Tia Maria, as reported by DJNW:

The company said that it will continue with its current investment projects in the Tia Maria and Toquepala mines, despite ongoing market turmoil.

"I don't think that delays are going to happen,"

As of Sept. 30 the company had committed $579.8 million for the Tia Maria project. Company chief executive Oscar Gonzalez Rocha said in the conference call that the total cost of that project in Peru could be about $1.0 billion, and that it is scheduled to be up and running by the end of 2010 or the first quarter of 2011.

I could continue, but you should have the message by now. Cut to last Friday, and in front of 800 of Peru's elite bizpeople at the APEC summit President Twobreakfasts said the following:

"Tía María cannot come to a halt, Mr Oscar González. "If it comes to a halt, we will have to look outside the country to sell it again."

So in Alan's pathetic little world, when PCU comes out with a confirmation that Tia Maria is on track in the next few days he can say "Look, minions...I am all powerful" or somesuch, even though PCU confirmed their plans to the general public just three weeks previously. I mean, what a freakin' asshole! The dude is a deceptive shit, be clear on that one.

His 19% approval rating is not a statistical freak.

Why PCU is in the long-term portfolio

I don't really talk about the long-term portfolio much, basically because it never changes and to paraphrase Warren Buffett the favoured holding period is forever. It's comprised of gold bullion, silver bullion and a few stocks, with the biggest stock holding as Southern Copper (PCU).

Why PCU? This is why:

MEXICO CITY, Oct 31 (Reuters) - Peruvian miner Southern Copper, one of the world's largest copper producers, announced on Friday it will pay shareholders a dividend of $0.34 per share on Dec. 5.

The company (PCU.N: Quote, Profile, Research), which is a unit of Mexican miner Grupo Mexico (GMEXICOB.MX: Quote, Profile, Research), also said etc etc yada yada continues here

PCU just keeps paying me money, that's why. Here's a chart that summarizes the cash dividends of the last five years.

That's U$7.38 in total (if you include the 34c payment to come in December 2008). I took position in the stock at a split adjusted $8 and bits thus we're getting close to that magic net zero price. So even though PCU has dropped a mountain from its highs of 2007 and 2008 ....

...I'm still a very happy holder overall. I think it was Livermore who used to say buy right and sit tight. A long-term portfolio is a different mindset. It has to be like that. DYODD, dude.

Reuters interviews the CEO of PCU and gets interesting comments

On this link right here, President and CEO of Southern Copper (PCU), Oscar Gonzalez Rocha, talks about the state of play in the company and the copper sector. I haven't seen the interview in English (yet), but here are the Gonzalez direct quotes from the interview as translated by me:

(On the $5.1Bn investment and expansion program at PCU for the next five years): "We think that due to the crisis our projects could move foward a little slower, but at the end of the day we hope to execute them."

"We do not anticipate the need for credit, as now the situation is very diffuclt due to the US problems, and we can develop the project from our income cash flow....but if it is necessary, togher with the board of diretcors we will see if we can take a little away from the dividend pool to complete the projects if it's difficult to get credit lines." Gonzalez then mentioned that the Tia Maria project (120ktpa Cu) is due online in 2010.

(On the current market prices): "Unfortunately prices (for copper) have dropped considerably, from U$3.20/lb to U$2.70/lb. This will definitely affect us because although this only started at the beginning of September and we don't know how long it will last, income will diminsh due to the lower prices." He then mentioned that cash cost was around $1/lb at present, the rise due to fuel and steel costs. Gonzalez said, "Up to now we believe our projects are feasible; if copper was priced at $1/lb they would not be feasible."

(On market demand): "There is still strong demand from Asian countries. We do not believe they are going to slow construction and technological advance, this different to the USA which is semi-paralyzed.......At the same time we have mines which are suffering from reduced mineral grades or are on strike such as at Cananea, and this copper that is not reaching the market makes supply slightly lower than demand. This will maintain prices."

Gold up 2%, Silver up 5%

Just to confuse you, here's spot copper

We went through this one over the weekend. Here's the chart and the post. As well as the metal, silver cream begins to float upwards (including MAI.to and site sponsor FVI.v). My advice is to bet on certainties and not to bother with the USA.

Meanwhile in base metals world, copper rises nicely but nobody is brave enough to buy the stocks. In a confident market FCX and PCU would be zooming, but as nobody understands what the hell has just happened to the US financials sector, let alone explain it to the numbskulls tuned into CNBC, there's still more fear than greed.

I continue to like cash position. Preserve your capital. No heroics amongst this stupidity, please.

Buying copper stocks at the bell

Just to put it on record.

The Freddie and Fannie news is going down well, by the looks of the futures market, anyway. That makes sense; Wall Street always applauds when the big guys get bailed out and the little guys get screwed....tis the way of the world.

The dollar has rallied bigtime and sits at 79 and bits on the USD. That makes sense in the first phase of a serious rebound, and it's taken the very-short-term shine off the PacRim metals rally last night. I'd expect the dollar to peak and reverse as the real money exits bonds and finds homes in equities. That's when commods will really rally; that's the moment when people will go "hey...recovering USA means they gonna buy more stuff again, dude. The dollar going down, dude. Hey, dat means copper's gonna go up, no?" or something similar.

Anyway, I like boarding trains while they sit at the station and I don't like trying to scramble on once they're moving. Buying FCX, PCU, ARG.to (Amerigo), CS.to (capstone).

Have fun , and DYODD.

UPDATE: Talking of Capstone, this just crossd the wires. This is what I call a very smart business move. Grab onto CS.to with both hands. Click right here to read the whole PR, as it includes important terms and conditions not included in the fist paragraph pasted here.

UPDATE 2: Bot FCX at 74 (this is not a ST trade). Can't get filled on ARG and CS yet. Haven't got round to PCU yet, but as it looks like the early doors euphoria is wearing off, waiting a bit longer might be wise.

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Press Release

Source: Capstone Mining Corp.

Monday September 8, 9:19 am ET

Management Teams to Combine Assets, Skills & Production in a Highly Complementary Transaction

VANCOUVER, BRITISH COLUMBIA--(MARKET WIRE)--Sep 8, 2008 -- Sherwood Copper Corporation (CDNX:SWC.V - News)(CDNX:SWC-DB.V - News) and Capstone Mining Corp. (Toronto:CS.TO - News) have entered into a Letter Agreement to combine, by way of a plan of arrangement or other form of business combination, to create a well-funded, low-cost, growth-oriented, copper company with two producing mines in mining friendly jurisdictions in North America. The two companies have agreed to combine on an "at-market" basis whereby each Sherwood shareholder will receive 1.566 shares of Capstone (based on the 20-day volume weighted average share price of the two companies). The boards of directors of Sherwood and Capstone have unanimously approved the terms of the transaction