I have previously recommended gold, silver and platinum in prior articles. Copper is both a precious metal and an industrial metal. There are a few reasons to consider being bullish on copper as both a precious and industrial metal. As a precious metal, I think it could rise with gold, silver and platinum due to central bank actions worldwide that will debase the value of fiat currencies. Copper, in addition to the other metals, are used in currencies (or in the case of gold as a currency itself). I lay out the thesis for precious metal appreciation in several articles, most prominently in the introduction of this recent article.
Copper also has uses industrially. Copper plays a vital role in many facets of our lives. People have been using copper since at least 9000 BC. One reason copper is so important is that it can be made into alloys, which are combinations with other metals to make new materials like brass and bronze. These alloys are harder, stronger and more corrosion resistant than pure copper.
Copper has many unique properties which make it a prime choice of industrial applications, such as:
- Being an excellent electrical and thermal conductor, second only to the more expensive silver.
- Being resistant to corrosion and oxidation (rust).
- Being non-magnetic.
- Being recyclable.
- Being ductile and easy to combine with other metals.
- Possessing anti-bacterial properties allowing for use in medical devices.
- Ability to be easily joined by soldering or brazing.
Given such properties and being less expensive than silver, copper is frequently used in electronics, locks, water pipes and in electrical wiring. Beyond the precious metal aspect of copper, it is reasonable to expect that an economic recovery that leads to more construction in the commercial and residential sectors should increase the demand for copper, as well as the price of the metal.
One place to look is housing and construction. Housing has finally come off its bottom and may be entering a long-term bull market. If housing as well as commercial/industrial construction is indeed picking up again, it should serve as another catalyst for the price of copper because residential and commercial construction uses approximately 40% of the copper in the United States, with direct residential construction constituting approximately two-thirds of the market. There were approximately 200 pounds of copper electrical wire in the average new home constructed in 2011. Office building copper use can trump this significantly depending on the size of the structure. Further, these figures do not include the amount of copper wiring that goes into additional home appliances, plumbing and air-conditioning systems, accounting for more of the demand for copper.
If housing has bottomed and new home construction continues then copper should have a tailwind leading to prices continuing to rise as the housing and homebuilding market improves. There is some evidence that things are improving. In the U.S homebuilder confidence has been rising. It was significantly up in July, and hit a five-year high during August. In September it ticked even higher to hit the best reading since June 2006 and rose even further in October, and has since leveled off a bit. This is strong for the housing market. Looking to the commercial and residential evidence, there have been sharply increasing property sales in China, which is a rapidly developing nation. Since I believe both the precious side of copper as well as the industrial side of copper could see increased demand and pricing in the next few years, I recommend the following methods right now to play copper: Physical coins and bullion, futures contracts, copper ETFs/ETNs, and the mining stocks.
Physical coins and bullion: It may not seem like it, but copper is a precious metal in many regards. As such, one of my preferred ways to own copper is in coin or bullion form, as I have recommended doing with gold, silver and platinum. All of these metals are precious, but have industrial applications. While not as highly in demand in this form as gold or silver, there are numerous dealers in most cities and on the internet where you can buy bullion bars and/or coins. I not only consider physical assets as a wise investment given endless government stimulus, but I also consider it to be a form of insurance in case of a total meltdown of the fiat currencies and modern financial systems we have in the world today. If you decide to invest in physical assets do so only from a reputable dealer. This is especially important if you're purchasing over the internet, where you will want to look for a well established dealer with a long history and stability in the business. The only downside from internet purchases is high shipping and insurance costs as well as the possibility of a required minimum purchase. Whenever possible, buy locally to avoid such excessive fees.
Futures contracts: Experienced investors who are bullish directly on the trading price of copper could consider getting long on copper futures contract. A potential way to get exposure to these futures is via the CME Group's Commodity Exchange (COMEX) under the symbol HG. This is a direct method of being exposed to copper prices, but it comes with substantial risk. A futures contract is an agreement to take physical delivery of 25,000 pounds of copper, which is priced per pound. The February 2013 copper contract closed Friday (1/18/12) at $3.66 a pound.
iPath Dow Jones-UBS Total Return ETN (JJC): The JJC is an exchange traded note (or an ETN) that provides investors exposure to copper futures without the difficulty of directly buying futures contracts. The primary difference between an ETF (the traditional exchange traded fund) and an ETN is that an ETF contains actual securities or commodities whereas an ETN gives exposure to contracts. As an ETN, JJC invests capital into copper futures contracts with varying time to maturity. JJC gives investors a cash payment at maturity based on the performance of the Dow Jones-UBS Copper Total Return Sub-Index. With $113.41 million in assets, JJC is trading around $46.38 and has an expense ratio of 0.75. JJC has a 52-week trading range of $41.70 to $51.41 on average daily volume of 66,000. The JJC is an efficient way for the average investor to gain exposure to copper and copper futures without having to deal with the complexities of trading futures, which involve substantial risk.
Mining stocks: A good way to gain exposure to precious metals as a whole, but to copper specifically is through the miners. As with gold and the SPDR Gold Trust ETF (GLD) as well as silver and the iShares Silver Trust (SLV), I do recommend the mining stocks as a way to gain exposure to the metals, particularly if the pay a dividend. Further, I believe that copper miners represent more diversified investments than solely copper as they often have cross exposure to iron ore, lead, zinc, silver and gold. Further, the copper miners generally offer good yields. If you believe that copper prices will rise, then it's hard not to like my two favorite plays in the mining space, Freeport-McMoran Copper & Gold (FCX), and Southern Copper (SCCO).
SCCO is a major copper miner in the western hemisphere. It engages in mining, exploring, producing, smelting, and refining copper and other minerals in Peru, Mexico, and Chile. It is involved in the mining, milling, and flotation of copper ore to produce copper and molybdenum concentrates; smelting of copper concentrates to produce anode copper; and refining of anode copper to produce copper cathodes, as well as refined silver.
The company operates Toquepala and Cuajone mines in the Andes Mountains located to the southeast of the city of Lima, Peru, as well as a smelter and refinery in the coastal city of Ilo, Peru. It also operates La Caridad and Buenavista copper mines, and smelting and refining plants in Mexico. In addition its major sites, the company operates five underground mines that produce zinc, copper, lead, silver, and gold; a coal mine which produces coal and coke; and a zinc refinery. It has 145,064 hectares of mineral rights in Peru; 176,250 hectares of exploration concessions in Mexico; 1,068 hectares of exploration concessions in Argentina; 35,958 hectares exploration concessions in Chile; and 2,544 hectares of exploration concessions in Ecuador.
The stock of SCCO has been firing on all cylinders trading at 52 week highs. However, there may be some small headwinds ahead for the company and the stock, which could hurt share prices in the short run and present a good opportunity to add to an existing position or initiate a new one. Workers in Peru are planning to vote whether or not they will strike. This is because the miners' union leaders were not satisfied with what the company has offered after two weeks of negotiations over new contract terms and will discuss options with workers this week. These workers held a two-day strike at the end of December. This could slightly impact quarterly production. The workers want a 15% wage increase as well as better safety conditions and health benefits. This would result in increased costs for SCCO, but an on going strike would be highly detrimental to production hurting top and bottom lines. Approximately 2,500 people work for SCCO in Peru. Peru's copper production is second only to Chile's and in 2011, SCCO produced about 24% of Peru's copper.
The stock is still a long-term buy at current levels, but I recommend waiting for a pullback to have a better entry price. The stock currently trades at $41.26 with a 17.9 p/e multiple. The stock is trading at the top of its 52-week trading range of $27.72-$41.28. On average 1.9 million shares exchange hands daily. SCCO pays a dividend of 9.8% annually (based on their last quarterly dividend of $2.75 which does fluctuate quarter to quarter).
FCX is the major player in the copper mining sector. It engages in the exploration, mining, and production of mineral resources. The company primarily explores for copper, gold, molybdenum, cobalt hydroxide, silver, and other metals, such as rhenium and magnetite. It holds interests in various mines located in the Grasberg minerals district in Indonesia; Morenci minerals district in North America; South America; and Tenke Fungurume minerals district in the Democratic Republic of Congo. As of December 31, 2011, the company's consolidated recoverable proven and probable reserves included 119.7 billion pounds of copper, 33.9 million ounces of gold, 3.42 billion pounds of molybdenum, 330.3 million ounces of silver, and 0.86 billion pounds of cobalt.
FCX recently announced purchasing two energy companies for $9 billion dollars. "The oil and gas assets being acquired possess the asset quality characteristics that we seek in our mining business - large scale assets with long lives, low cost and geologic potential to support growth through exploration and development," said Richard C. Adkerson, CEO of FCX regarding the acquisitions. Investors sold the news and shares of the stock were crushed. Shares had since rebounded about 10% since the selloff going into its most recent earnings.
Investor sentiment was negative from the chatter I had been hearing going into earnings. However, FCX delivered a beat. According to news release and to the quarterly report, for Q4, FCX beat slightly on revenues and beat expectations on earnings per share. Compared to the prior-year quarter, revenue grew and GAAP earnings per share expanded. Gross margins and operating margins dropped a bit whereas net margins increased. FCX reported revenue of $4.51 billion. FCX reported sales were 8.4% higher than the prior-year quarter's $4.16 billion. Non-GAAP earnings per share came in at $0.74 whereas GAAP earnings per share of $0.78 for Q4 were 15% higher than the prior-year quarter's $0.68 per share. Overall, it was a strong quarter. Looking ahead, next quarter's estimate for revenue is $5.49 billion with earnings per share estimates of $1.06. For 2013, the average estimate for revenue is $22.38 billion with average estimated earnings per share of $4.58.
FCX currently trades at $35.12 with a 11.3 p/e multiple. It has a 52-week trading range of $30.54-$48.96 and on average 17.0 million shares exchange hands daily. FCX pays a dividend of 3.7% annually.
Global X Copper Miners ETF (COPX): While SCCO and FCX are two of my favorite plays in this space, there are others. Those investors who prefer not to invest in a single copper miner can consider the COPX. This ETF offers exposure to the entire copper mining sector. This is an ETF that tracks the Solactive Global Copper Miners Index, and its holdings include global firms from across the international spectrum. At this time COPX has approximately $31 million in assets. The ETF is currently is trading at $13.50 and has an expense ratio of 0.65. The fund has a 52-week trading range of $10.30 to $15.82. While offering exposure to the copper mining sector as a whole, the ETF has yet to pick up in popularity. This is evidence by very low volumes. In fact, only about 28,000 shares exchanging hands daily. Nevertheless, it offers exposure to all the miners as a whole, and given that many pay dividends, it is not unreasonable to expect that COPX, once it gains more traction, could begin paying regular dividends to its investors.
Bottom line: Copper is both a precious and industrial metal. Copper stands to gain from central bank action as well as from increasing demand in construction. There is strong evidence that housing has bottomed with homebuilder confidence near a six-year high. With a rebounding economy, both commercial and industrial construction should pick up. To gain exposure to copper, one can purchase physical bullion, trade futures, buy shares in an ETN such as JJC, an ETF such as COPX, or purchase the mining stocks.