Copper producers have enjoyed a spectacular rebound in the stock market over the past eight months, no doubt raising questions among investors about how long the good times will last.
The argument for staying put is persuasive, though: Global demand for copper should rise with the post-pandemic global economic recovery and surging interest in copper-consuming renewable energy projects, according to analysts, underpinning a rally that has already lifted some stocks to their highest levels in several years.
Freeport-McMoRan Inc., Freeport-McMoRan Inc., a U.S.-based pure-play copper miner, has seen its share price rise almost 300 per cent from the lockdown lows in March and is now approaching a five-year high. (Full disclosure: I own this stock, which has stood out from my collection of mostly plodding laggards).
Vancouver-based First Quantum Minerals Ltd., First Quantum Minerals Ltd., whose copper operations accounted for more than 80 per cent of revenue in the last quarter, has seen its share price rise 220 per cent since March. The shares are now trading at two-year highs.
Commodity producers can be notoriously volatile: During downturns in recent years, the above two stocks fell more than 70 per cent. That’s why the reasons for investors holding on during the current rally – or gosh, even buying into it – need to rest on a solid outlook for the price of copper.
The demand story is appealing.
Daniel Ghali, a commodity strategist at Toronto-Dominion Bank, explained in an interview that there are two key narratives here. One, the global economy will continue to improve even if there are short-term setbacks owing to surging COVID-19 infections. Economic activity is important because copper is used in a lot of consumer products.
And two, the growth in renewable energy will likely gain momentum under a Joe Biden presidency, even if the U.S. president-elect’s ambitious Green New Deal doesn’t live up to expectations.
Already, the supply of copper is struggling to meet demand, as China’s ravenous appetite for the base metal leaves shortages elsewhere in the world.
"That’s the big story – this growing supply-risk premium,” Mr. Ghali said.
The price of copper has rebounded more than 60 per cent from its lows in mid-March. At US$3.22 a pound, the metal now trades at its highest level in more than two years.
Orest Wowkodaw, an analyst at Bank of Nova Scotia, argued in a recent note that current low inventories and the strong possibility of a supply deficit in the medium- to long-term means that “the copper market appears poised for another great cycle in the years ahead.”
That’s good news for copper producers, even if the ride ahead isn’t smooth because of COVID-19 and U.S. political mayhem.
Analysts particularly like companies that are set to increase their copper output in the years ahead. Mr. Wowkodaw mentioned four: Teck Resources Ltd., Freeport-McMoRan, First Quantum and Lundin Mining Corp., where output should rise between 26 per cent (Lundin) and 50 per cent (Teck) through 2024.
He expects that investors will ascribe a higher valuation to copper producers as the bullish case plays out, giving share prices an added boost.
Emily Chieng, an analyst at Goldman Sachs, also singled out Freeport-McMoRan and First Quantum for their copper production growth.
In addition, she argued in a recent note that companies that have invested huge sums into new copper projects in recent years – causing capital expenditures to overwhelm cash flow generation – are now set to harvest these investments. Freeport-McMoRan stands out as a company that will see its investments pay off over the next few years.
“More importantly, we expect capital intensity to decline as management teams pause and reap the rewards of new production. We believe Teck’s moment is about two years away,” Ms. Chieng said in the note.
Given the upbeat long-term views on copper, the wait could be profitable for investors.
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David Berman