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 first look is housing, which has finally come off its bottom and may be entering a long-term bull market. A strong indication of this reality is that the homebuilding stocks have been among the market leaders in 2012, as the SPDR S&P 500 Homebuilder ETF (NYSEARCA:XHB) is up another 9% year-to-date. While homebuilding stocks are a good buy on a confirmed housing rebound, owning copper could be a rewarding pin action play to consider. 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 2012. 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. United States homebuilder confidence was up sharply in July, and hit a five-year high in 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 in recent months. 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 becoming a precious metal in terms of the ways you can purchase it. While not traditionally considered in this regard, it has been utilized in money. The United States used copper in its pennies until 1982, when it became too expensive to use, similar to the removal of silver from US dimes and quarters in 1965. While copper is still primarily an industrial metal, it is minted in forms similar to the traditional precious metals (gold, silver, platinum etc.). In some circles, it is now being referred to as the "red gold." As such, as with gold and silver, 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.
Copper ETN: iPath Dow Jones-UBS Total Return ETN (NYSEARCA:JJC): The JJC is an ETN that gives investors exposure to copper futures without the complexity of directly buying futures contracts. Without delving too far into the differences, take note that an ETN is different than an ETF. An ETF contains actual securities or commodities whereas an ETN gives exposure to contracts. More information about the differences between an ETF and ETN can be found here. JJC gives investors a cash payment at maturity based on the performance of the Dow Jones-UBS Copper Total Return Sub-Index. With $111.21 million in assets, JJC is trading around $41.72 and has an expense ratio of 0.75. JJC has a 52-week trading range of $41.38 to $49.33 on average daily volume of 65,000 shares exchanging hands daily.
Mining stocks: A good way to gain exposure to precious metals as a whole, but to copper specifically is through the miners. I have previously recommended gold miners as the best alternative to playing the SPDR Gold Trust ETF (NYSEARCA:GLD). Further, I believe that copper miners represent more diversified investments than solely copper as they often have cross exposure to other metals. Further, these miners generally pay a nice dividend. If you believe in a rebound in housing and commercial construction and thus believe that copper prices will rise, then it's hard not to like my three favorite plays in the mining space, BHP Billiton (NYSE:BHP), Freeport-McMoRan Copper & Gold (NYSE:FCX), and Southern Copper (NYSE:SCCO), right now.
BHP engages in the exploration, development, and production of oil and gas; mining and refining of bauxite into alumina, and smelting of alumina into aluminum metal; and mining of copper, silver, lead, zinc, molybdenum, uranium, gold, diamonds, and titanium minerals, as well as development of potash deposits. It also involves in the mining and production of nickel products, manganese ore, and manganese metal and alloys, as well as in the mining of iron ore, metallurgical coal, and thermal coal.
BHP sells its copper, lead, and zinc concentrates, and alumina to smelters; copper cathodes to wire rod mills, brass mills, and casting plants; uranium oxide to electricity generating utilities; rough diamonds to diamond buyers and diamond manufacturers; nickel products to stainless steel, specialty alloy, foundry, chemicals, and refractory material industries; metallurgical coal to steel producers; and energy coal to power stations, power generators, and industrial users.
The stock currently trades at $67.26 with a 18.7 P/E multiple. It has a 52-week trading range of $59.87-$80.54 and on average 2.2 million shares exchange hands daily. BHP pays a hefty dividend of 3.4% annually at current levels.
SCCO is also a major copper miner. 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 the 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 to 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 currently trades at $35.54 with a 15.6 P/E multiple. The stock is trading in the middle of its 52-week trading range of $27.72-$42.03. On average 1.9 million shares exchange hands daily. SCCO currently pays a dividend of 2.7% annually
FCX is a bellwether in the 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.
The company 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. This acquisition has been questioned by many on Wall Street, but only time will tell if this investment will pan out for the company. Despite this, the company's mining assets are still of value considering the amount of gold, silver and copper it produces.
Shares of the stock currently trade at $32.10 with a 10.0 P/E multiple. It has a 52-week trading range of $30.54-$43.65 and on average 14.0 million shares exchange hands daily. FCX pays a bountiful dividend of 3.9% annually.
Global X Copper Miners ETF (NYSEARCA:COPX): For those who do not want to invest in a single copper miner the COPX offers exposure to the entire sector. This is an ETF that tracks the Solactive Global Copper Miners Index, and its holdings include global firms from across the international spectrum. This international fund has roughly $31 million in assets, currently is trading at $11.00 and has an expense ratio of 0.65. The fund has a 52-week trading range of $10.30 to $14.50. Although the COPX offers exposure to the copper mining sector as a whole, the ETF is thinly traded, with only about 35,000 shares exchanging hands daily.
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, once can purchase physical bullion, trade futures, buy shares in an ETN such as JJC, an ETF such as COPX, or purchase the mining stocks. In my opinion BHP, SCCO and FCX represent the three best plays in the copper mining space.