Copper Mining: Poised for a Strong Comeback

What should investors think about copper just under $3/lbs? In my opinion investors (even those more short term trading oriented) should not freak out if copper fails to break above $3/lbs.

Salida Capital, one of my personal favorite global macro investment firms, did some work a few months ago on copper with respect to Chinese buying patterns. They argued that, “China’s import pattern over 2004–09 also indicates a noticeable price sensitivity, although the key level appears to be US$3.00/lb. While that price is above today’s level, we would note that the current supply/demand situation is markedly different than in recent years. As such, we would not be surprised if China’s discretionary price level has been lowered as a result. After all, the country knows full well it faces a buyers’ market — and it is the only major buyer.”

Presently, copper prices are just under $3/lbs. which makes this analysis extremely relevant. If Salida is correct in their assessment, Chinese copper imports might begin to slow until the price of copper corrects a bit. Although, imports have remained extremely robust and so long as relatively decent importing continues copper companies should be poised to do very well–even if the price of copper can’t crack $3/lbs.

I don’t think it would be particularly prudent to run out and load up on copper futures. However, as long as copper can sustain prices well above the cost of production (which if I recall correctly is somewhere between $1.10-1.50/lbs), copper mining companies can earn an excellent return on invested capital. This is to say, if copper prices remain between $2.50-$3.00/lbs, copper mining stocks should continue to drift higher and higher as each month passes regardless of whether copper futures can break out above $3/lbs. Plus for those investors interested in dividend payouts... assuming copper prices can stay between $2.50-$3.00/lbs and the global economy continues to stabilize, dividend payouts should start to make a strong comeback in the copper mining sector.

Disclosure: Author is long FCX, PCU, VALE, PSEC, and ETV.

Comments

[John Mylant:]

Good call! The Closest thing we have to copper ETF & it is doing very well! DBB I beleive it will continue to move up through the rest of this year.

--John Mylant
mylantsmoneyblog.typep.../

Oct 20 01:27 PM

[Wildebeest:]

Cash cost for the larger producers is lower than that actually e.g. I'm pretty sure that escondida is down around the 60-70c range.

Even when everything crashed copper prices stayed above cost (unlike eg. zinc and nickel). Of course this meant that less copper projects where affected (closed, mothballed ...) compared to e.g. zinc and nickel. This in turn means that any spurt in demand -- and admittedly there is nothing on the horizon yet -- should see zinc prices respond well due to the greater likelihood of a squeeze. Not so much nickel because the stockpile is pretty big.

Oct 20 06:14 PM

[davidbdc:]

PCU just raised its 3Q dividend from .118 to .18 so things seem to be heading in the right direction.......still need to see them continue to increase before celebrating too much.

Oct 20 06:20 PM

[Peter Medved:]

I'll be putting some long term funds into VALE on this news, especially as they are looking at yearly growth across all their assets of 12% plus through 2014 : bit.ly/1VrE1Y

Oct 21 03:54 AM

[ETFdesk.com:]

Commodity brokers say they are becoming increasingly bearish on metals such as copper and aluminum, amid worries that central banks are preparing to rein in the stimulus money. bit.ly/26dfE8

Oct 26 02:39 PM

[David White:]

Great article Daniel.
I tend to agree with you about the longer term prospects of copper and copper mining stocks.

In the short term the markets are over bought. The USD has fallen demonstrably, but now it is likely poised for at least a short term rebound upward. It seems to have already started this against the Yen. With the bad economic news from the UK last week, it seems likely to rebound against the UK pound in the near future. If the US GDP number is good on Thursday, that may help it rebound against the Euro. Plus Prechter has been forecasting a rebound in the USD based on the overwhelming bearish sentiment against it. Further the Fed keeps posturing about rasing interest rates. It is definitely already curbing many other stimulatory actions, which have been pushing the USD downward. Even this posturing is helping the USD gain traction.

If I am correct about the USD going upward near term, that is likely to mean commodities will go downward as the USD goes up. Most commodities are USD denominated. This will put pressure on commodity related stocks. Further the US equities markets themselves are over bought and over priced for their current (and near term future) results. They are primed to retrace. Getting into commodity stocks at this exact point in time might be a big money loser in the short term. I think I prefer to wait until after a good correction. Oil at $80 seems too high a point to enter in this economic environment. Other commodity prices are similarly at near term peaks. I like your idea, but the timing may be a little off.

If the USD carry trade starts to unwind due to a rebound in the USD, virtually everything will crash as people will sell their assets to pay back the USD's they borrowed. This is a strong possibility. With a market up about 60% since March, I think I may wait for a decent correction before getting in on the up side.

Oct 26 02:48 PM

[Mad Hedge F...:]

okn b Last February, I told you I would kill myself if you didn’t buy the world’s largest copper producer, Freeport McMoRan (FCX) (click here for the call at www.madhedgefundtrader... ). OK, I exaggerate. I said I would throw myself in front of a train. Who knows, I might have survived the train. Since you all followed my advice, you are all now as rich as Croesus, as the stock has since gone parabolic, from $15 to $85, up 560%. Providing the rocket fuel for this move was copper’s leap from $1.25 to $3.00. Now that we have broken out through the $3 level in the red metal, the next leg may be in progress. CEO Richard Adkerson is the kind of burly, no nonsense kind of guy you might expect to find in an afterhours bar near one of the many open pits the company works around the world. Although Q3 revenues fell from $4.6 billion to $4.1 billion YOY, FCX has reinstated its dividend, and is clearly back in the catbird seat. China is importing record amounts of copper both for stockpiling and consumption by it explosively growing auto, consumer, infrastructure, and power industries. Record gold prices, which FCX also mines, are giving a further boost. Projects mothballed last year are back on track, and idle equipment is going back to work. When I was at Morgan Stanley during the eighties, any association with the red metal was considered career death, as it was in the grips of a 20 year bear market, trading as low as 60 cents.. The guy who covered our big client in the sector, Anaconda, was nice enough, but people avoided his table in the company cafeteria in the GM building like he had AIDS. I have to pinch myself when I see copper’s performance today. I wonder where that guy is now?

Oct 26 06:19 PM