Something very interesting is happening in the metals markets these days. Copper prices are up, and the demand for the metal is high despite a dismal global economy. Copper was actually trading at $7,815 a metric ton for three-month contracts on the London Metals Exchange on July 3. The situation was even better in Shanghai, where an October copper contract on the Shanghai Futures exchange was trading at 56,310 yuan, or $8,900 a metric ton, according to Reuters. Reuters speculated that the increased demand was created by an increase in the Chinese Purchasing Managers Index, which expanded at its fastest pace in June. In this article, I will look at how this development could impact copper miners Freeport-McMoRan (FCX), Southern Copper (SCCO), Newmont Mining (NEM), BHP Billiton (BHP), Rio Tinto (RIO), Anglo American (OTCPK:AAUKF), and Barrick Gold (ABX).
Freeport's stock went up by 3.9% on July 3 and it is easy to see why. The company is in a perfect position to meet China's increased demand for copper with its Grasberg Mine in Indonesia. The reason for this is obvious the Grasberg mine is located in New Guinea, which means a shorter voyage to China. That gives Freeport an edge over competitors like Southern Copper that have to ship copper half way around the world from Chile and Peru. Even if Freeport has to pay higher excise taxes to the Indonesian government it can still make up profits with lower shipping costs. Therefore Freeport should be one of the first companies to profit from higher copper prices because of its proximity to the biggest copper consumer China.
What this news means is that copper supplies could be so low that the global economic downturn will have little effect on them. The copper market is so tight that it will quickly recover from any falls in demand created by the economic situation.
Even such limited good news as the recent European bailout deal caused copper to go up. That means the copper market could even be tighter than we thought and the metal worth more. There's only one reason why that could be happening. The supply of copper is actually lower than we thought it was.
Instead of a glut, there might actually be a copper shortage out there, which is good news for Freeport and other copper producers such as Newmont Mining, BHP Billiton, Rio Tinto, and Anglo American. These companies all stand to gain if there is even a slight copper shortage.
Mining stock investors will also gain because of all the massive investments by mining companies. It looks like investments such as Rio Tinto's OyuTolgoi copper mine, in Mongolia, BHP's Olympic Dam in Australia, and Freeport's expansion of the Grasberg could actually pay off big time. The Oyu Tologi is the major mine best poised to satisfy China's copper demand because it is right next to the Chinese border. That means copper can be shipped directly to Chinese customers from it by rail, which means lower transportation costs.
So copper mining stocks now look like a really good long-term value play because they pay off in good times and bad. Copper miners seem to be in a better position to get through the economic rough times than some of the other miners because of the demand for the metal.
That would indicate that a strategy of investing in copper specialists such as Freeport-McMoRan makes a lot of sense. Freeport is the world's largest copper company; it has the world's biggest copper mine at the Grasberg in Indonesian New Guinea, and it is developing a massive new copper mine at TenkeFungurume in the African Congo. No company seems to be in a better position to profit from the current copper market than Freeport.
Its earnings per share, dividends, and stock values should keep going up with the good news about copper. If that good news continues, expect Freeport's stock to keep going up possibly for the rest of the year and the next few years. No private company has access to larger reserves of copper.
Copper Prices Should Stay Up for the Foreseeable Future
Copper prices should remain up for the foreseeable future and boost copper mining stocks because it is obvious that there is a slight shortage of the metal. If there was not a shortage, prices should be down because of decreased industrial production in Europe and the United States. Yet it is not, which would indicate that supplies are even lower than we thought.
If copper supplies were large, the copper Americans and Europeans are not buying would have simply been shipped to China and sold there. Instead, there appears to be something of a slight shortage in China, which is unusual. That, of course, means the market is capable of absorbing quite a bit of increased copper production.
That also means producers should be able to keep prices up and sustain cash flow. They will be able to cover increased costs and absorb the losses from falls in demand for other metals, such as platinum, so the higher copper prices should help the entire metals industry and provide it with the cash it needs in order to survive the downturn. Higher copper prices should also help miners cover the increasing costs of doing business, including rising energy costs, and maintain a healthy earnings per share.
The question we have to ask ourselves is if copper will stay up or production will start increasing and push down prices. The most likely answer to this question is no, because if there is any additional copper out there, it is not in the market. The reason it is not in the market is that there is not any additional copper to sell.
Not even the world's largest copper producer, the Chilean government company Codelco, seems to have copper to spare. There have been reports that Codelco's production is down.
Part of the reason why copper miners are still a good long-term value play is that Chinese demand for the metal is still high. Chile's deputy mining minister told the Toronto newspaper Globe and Mail that he has not seen a fall in copper demand from China. Instead, Pablo Wagner expects Chinese copper demand to increase by 5% to 6% in 2012. Wagner believes the increased demand is being driven by the expansion of the energy and telecommunication sectors in China.
This seems to be additional proof that copper mining stocks could be one of the best ways for value investors to survive a global economic downturn. They seem to be at least partially recession proof, and copper prices don't seem to be affected by factors such as unemployment.
The question we have to ask ourselves is if this situation will continue for the foreseeable future. The most likely answer is yes, because copper has not fallen yet. If copper prices were vulnerable to economic conditions, they would have already fallen drastically.
Instead, they seem to be remaining steady or increasing slightly. That would indicate that copper is one of the best hedges against the current global economic situation. It might even better protection than gold, which fluctuates wildly. Copper stocks then would seem to be a slightly more reliable investment than gold right now.
The moral of the story is that if you want a good mining stock that's going to keep its value and generate cash flow in today's economy, think copper. The steady price of the metal should enable companies such as Freeport-McMoRan and Billiton to maintain respectable cash flows through the economic turbulence. It should also help Barrick Gold, which made some major moves into copper in recent years.
Copper miners would seem to be the safest bet in the metals sector at this moment. The price for the metal is rising slightly, and demand seems to be holding steady despite unemployment and cutbacks in manufacturing, so investors looking for cash flow should start thinking about copper stocks. It also looks like Freeport-McMoRan could still be the best deal in copper.