Rio Tinto and Southern Copper

The large miners are set to report earnings in the next two weeks and they are predicted to be blowouts. These stocks are flush with cash and are looking to make acquistions, increase dividends, and launch large share buybacks. They also have juicy option premiums! One of my favorites is Rio Tinto. The company has a decent debt load but has paid down nearly 40 billion from its acquisition of Alcahn back in 2007. The company has a foward P/E of 7.50 and should benefit from higher commodity prices over the next few years.

Here is a short description of southern copper from seeking alpha. This one should benefit from increased copper demand in 2011. Copper Industry. Market cap of $38.38B. PEG ratio at 0.85. 5-year average ROA at 26.7% vs. industry average at 15.21%. 5-year average ROI at 30.99% vs. industry average at 18.73%. 5-year average ROE at 45.48% vs. industry average at 21.3%. Short float at 3.16%, which implies a short ratio of 2.81 days. The stock has gained 55.53% over the last year.

Buy 100 RIO @ 73.12:                     ($7,312)
Sell 1 Jan 12 75 Call @ 9.00:             $900
Sell 1 Jan 12 75 put @ 13.08:            $1,308
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Total cash outlay:                              $5,104

Potential return: $900+1,308+188= $2,396 or 47% on a stock that needs to go up by 2.5% in the next 11 mos.

Break-even: 63.02

Buy 100 SCCO @ 46.32:              ($4,632)
Sell 1 Jan 12 50 call @ 4.1:             $410
Sell 1 Jan 12 50 put @ 10.2:           $1,020
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Total cash outlay:                         3,202

Potential return: $1,798 or 56.15% on cash invested. Shares need to increase by 8% by jan 2012.

Break-even: $41.01

I also might buy a protective put on these below our break-even, just in case the copper market crashes for a little insurance. Look at the SCCO 35 put at 2.9 and the RIO 50 put at 2.85