What is causing Southern Copper's 8.6% drop today and should you buy?

Southern Copper (SCCO) is down almost 9% as I write this. Why is this high dividend stock getting hammered by stock market participants? I'll tell you why.

Ollanta Humala, national socialist, just won the Peruvian presidency by a slim margin. "He campaigned as a center-left leader with the desire to create a more equitable framework for distributing the wealth from the country's key natural resources, with the goal of maintaining foreign investment and economic growth in the country while working to improve the conditions of an impoverished majority" according to the wikipedia article on Ollanta Humala. This means that the cost of doing business in Peru is going up for Southern Copper. His national socialist policies will fail just like every other attempt at national socialism. His government will blame capitalism for its failed policies. He will campaign for reelection threatening nationalization of the mining industries. This is the pattern in socialist countries like Venezuela, Bolivia, and many other in Latin America. Never forget that many mining companies have exposure to political risk.

So how much of Southern Copper's business is at risk in Peru? Answer: about 61% of it's 2007 copper production according to the wikipedia entry on Southern Copper. The company owns two major copper mines in southern Peru (Hamala's strongest political support is in southern Peru). The Cuajone mine produced 182 tons of copper in 2007. The Toquepala mine produced 177 tons of copper in 2007. They produced 359 tons combined. The company's northern Mexican mines produced 223 tons combined. The Peruvian mines produced 61% of SCCO's copper in 2007. I doubt these percentages have changed much in four years time.

Conclusion: Investors are fleeing Southern Copper due to the threat of higher taxation or nationalization at the barrels of Peruvian guns. SCCO needs to trade below 12 times five year average earnings on $1.92 to get me to consider buying. Wait until the stock falls below $23.04 before buying. Political uncertainty, a shaky dividend, and a worldwide double dip recession will definitely bring this high dividend stock down into an open pit mine.

Link to article: http://bloom.bg/l4AzJi

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