Copper prices have staged a strong rally over the past 3 months, rising from about $3.45/lb to about $3.70/lb at today's prices. The rally is expected to continue as the economic data from some of the world's biggest economies continues to improve. For example, just on Monday, copper rose as traders bet that gains in Chinese equities markets and a sharp rise in U.S. durable goods orders signaled higher demand for the industrial metal.
Copper is an industrial metal and therefore, it is very sensitive to economic cycles. Copper has a variety of uses, and it is a key component of every-day life, from the coins in our pockets to the powerlines that provide us with electricity. Furthermore, its extensive use in "green" technologies, such as solar cells and electric vehicles, ensures that copper will continue to play a key role in our sustainable future. Copper is conductive, durable, malleable, and eminently recyclable, making it one of the world´s most useful natural resources.
Copper is found in many places in the world, but Chile is a notable hotbed for Copper. Chile is not only the largest copper producer in the world, but also the country with the largest worldwide reserves of the red metal, reveals the latest commodity report by the U.S. Geological Survey. According to the agency, Chile has 28% of the world reserves, more than twice the reserves of its neighbor, Peru, the No. 2 global copper producer. It means that the South American country has reserves of 190,000 million tons of copper -- 26% more than it was thought (150,000 million tons) -- which guarantees copper extraction for the next 100 years, at the current extraction rate.
The economic data has been the big driver behind copper gains, and here is an overview. The news from China has been positive. China's economy grew by 7.9% year over year in the fourth quarter, up from 7.4% in the third quarter. The news provided relief to commodity bulls, who feared that the world's second-largest economy may have continued to slow after growing at the weakest pace in three years in Q3. Instead, it seems as if China's growth may have stabilized above the official government target of 7.5% -- a positive outcome.
Last week, China's neighbor, Japan, also reported positive economic news. Japan raised its expectations for the economy for the first time in eight months, as private consumption held firm and business sentiment improved in a sign that Prime Minister Shinzo Abe's policy of easy money and big spending had begun taking effect. "The economy is weak, but signs of bottoming out can be seen in some areas," the report said. That was an improvement from last month, when the government said the outlook was weakening because of a slowdown in overseas economies.
Analysts have also come out positive on the metal. One analyst recently said that the economic recovery and growth should push prices up. "Copper is one of those metals that people feel is linked to the industrial cycle," said Carole Ferguson, an analyst at SP Angel Corporate Finance LLP, a broker and adviser in London. "Demand is obviously returning, we've had good numbers coming out of China and the U.S. definitely looks as if it's in a recovery trend."
HSBC raised its 2013 copper price forecast, saying it expects positive sentiment to drive prices for the metal in a structurally balanced market. The bank lifted its 2013 forecast for the average cash copper price to $8,000 per ton from $7,500 (London's copper metric) to reflect the metal's relatively good start to the year. "Copper, perennially described as fundamentally tight, actually finished 2012 posting a gain in inventories," analyst Andrew Keen said in a note to clients. "This market remains balanced in our view, and this is enough to keep prices high when sentiment is good."
With that said, the copper sentiment is positive, and should continue to be so. Here are four stocks that should benefit from the price pickup in copper:
Freeport-McMoRan Copper & Gold (FCX) is a leading international mining company with headquarters in Phoenix, Arizona. FCX operates large, long-lived, geographically diverse assets with significant proven and probable reserves of copper, gold and molybdenum. FCX has a dynamic portfolio of operating, expansion and growth projects in the copper industry and is the world's largest producer of molybdenum. The company's portfolio of assets includes the Grasberg minerals district, the world's largest copper and gold mine in terms of recoverable reserves; significant mining operations in the Americas, including the large scale Morenci and Safford minerals districts in North America and the Cerro Verde and El Abra operations in South America; and the Tenke Fungurume minerals district in the Democratic Republic of Congo.
Freeport has kind of struggled this past year, and is trading just a bit off its 52-week lows of just over $30 a share. The big undoing for Freeport has been its announced acquisition of Plains Exploration & Production (PXP) and McMoRan Exploration (MMR), under which FCX will acquire PXP for approximately $6.9 billion in cash and stock, and FCX will acquire MMR for approximately $3.4 billion in cash, or $2.1 billion net of 36% of the MMR interests currently owned by FCX and PXP. That sent shares from $38 a to $31. However, the stock has recovered since that drop, and is now trading at about $35 a share, and analysts see the stock continuing to rally to trade at $40 a share.
HudBay Minerals (HBM) is a Canadian integrated mining company with operations, development properties and exploration activities across the Americas principally focused on the discovery, reduction and marketing of base and precious metals. The company's objective is to create sustainable value through increased commodity exposure on a per share basis by growing long-life deposits in high-quality and mining-friendly jurisdictions.
HBM is a quieter and smaller copper name, but nonetheless, is an interesting one to take a look at with the growth projections. HBM expects its copper production to increase 390% between now and 2015, with a 115% increase in precious metals production and 30% growth in zinc over the same time period, which are some pretty hefty growth figures. There also is significant downside protection built in with its balance sheet containing $1.4 billion of cash.
Swingplane Ventures (OTCQB:SWVI) is committed to increasing current production on it Algarrobo Property in Chile to a higher level, resulting in a more significant operation. A due diligence property evaluation suggests there is a significant opportunity to further develop the mineral potential of the property and dramatically increase the current level of production. In addition, current limited production emphasizes recovery and sale of high grade copper ore at an average grade of 9% Cu. The company believes there is a tremendous opportunity to develop a state of the art processing facility to process and recover copper concentrate from ore having a grade as low as 1% (or less), further increasing the economic potential of the property.
Recent news from the company involves providing additional detail on its Algarrobo mine. Copper from limited surface exposures on, and immediately adjacent to, the Algarrobo Property was first mined in the late 1700s. Since that time, approximately 35 mines have been excavated on 4 primary and approximately 10 secondary veins. It has been estimated that the historical British operator produced copper ore having a cut-off grade of +/- 6% Cu. That is a very impressive number compared to other miners around the world. Major copper mines around the world generally average less than 1% copper. A prime example is Freeport McMoRan's Grasberg mine, which has approximately 2.5 billion tonnes of copper grading at 1.1%.
Based on size and time on the market, Swingplace Ventures most closely compares to HBM, which rose to $7 a share in its first year on the market.
Southern Copper (SCCO) is one of the largest integrated copper producers in the world, and has the largest copper reserves of the industry. The company produces copper, molybdenum, zinc, lead, coal and silver. SCCO is 81.3% owned by Grupo Mexico, a Mexican company listed on the Mexican Stock Exchange. The remaining 18.7% ownership interest is held by the international investment community. All of its mining, smelting and refining facilities are located in Peru and Mexico, and the company conducts exploration activities in those countries and Chile.
SCCO is another company based in the Southwestern United States, however, it does have one distinct advantage versus FCX, it is a pure-play copper stock, which FCX is not after it diversified into the oil and gas sector with its recent acquisition. The company released earnings results Thursday afternoon that were steady, albeit unspectacular. In FY12, net sales were $6,669.3 million, only 2.2% lower than its FY11 historical record of $6,818.7 million, even though the copper price decreased by 10%. This result was achieved by an increase in sales volumes for copper (+7.1%), silver (+14.6%) and zinc (+3%). EBITDA in FY12 was $3,772.6 million (56.6% margin), only 3.5% lower than the record set in FY11.