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New lustre for copper with first investment fund

An employeee at the BHP Billiton copper mine at Escondida works amid sheets of copper.

It has been a boon for gold and its lesser cousin silver . Uranium got one a few years ago. Even molybdenum had one for a while.

Now Dr. Copper, so named for its role as an indicator of economic health, is finally getting its own investment fund.

Bankers at Scotia Capital Inc. have filed a prospectus for the ScotiaMocatta Physical Copper Fund, a financial vehicle that will invest directly in the metal used to make wire and pipe. The proposed offering, which sources said intends to raise at least $100-million and as much as $300-million, comes as copper has been on a tear. Stockpiling by China, combined with the belief that the battered global economy is in the early stages of a recovery, has made copper a leader in the revival of the base metals sector. It surged to a 10-month high Wednesday on the London Metal Exchange (LME), hitting $6,149 (U.S.) a tonne.

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"We think the economy is turning around," said Brian McChesney, the Scotia Capital investment banker and structured-product specialist who will be CEO of the fund. "We've started to see copper rally already. It's a great way to get a pure play on copper as opposed to buying a mining stock where you are exposed to operational risk, environmental risk and political risk."

Surprisingly, the copper fund will be the first of its kind.

While there is a relatively small copper exchange-traded fund in Europe that is linked to the futures market, the ScotiaMocatta vehicle will mark the first time a large fund will buy and store copper.

The trust's units will give investors an interest in the fund's copper holdings which will provide direct exposure to the market performance of the metal.

Of course, there is a challenge with running a physical copper fund, which may explain why it has never been tried before.

Where does one store all that metal? If successful, the fund will need to find a place for between 20,000 and 60,000 tonnes.

Mr. McChesney expects the bulk of the fund's holdings will be in the form of LME warrants, or futures that can be converted into warrants. Each LME warrant represents physical copper that is stored in a bonded and insured LME warehouse.

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"You can go to the warehouse and kick it," he said.

However, the copper fund is also considering acquiring its own copper from producers and has already held preliminary discussions with potential suppliers.

While copper would certainly need more physical space than a store of gold worth the same value, it won't need the security level of a Fort Knox.

"If the deal size gets larger, we will look to acquire our own warehouse space to try and reduce costs and do it that way," Mr. McChesney said. "This is not like storing gold and silver where you need a vault to put it in. You need a secure warehouse. That's not nearly as high a standard as gold or silver."

Gold exchange-traded funds have exploded in popularity in recent years, giving investors exposure to the gold price without the volatility, cost inflation and risks associated with investing directly in mining companies.

For example, shares of Barrick Gold Corp., the world's largest producer, have returned about 85 per cent (in U.S. dollars) in the past five years, while the price of gold has climbed 139 per cent over the same period.

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Interest in bullion funds has helped support a rising gold price but has also diverted investor money away from miners. Some 1,300 tonnes of gold are held by ETFs and gold holding funds representing about $42-billion worth of direct investment.

But copper and copper miners have been different.

The world's largest copper miner, Freeport-McMoRan Copper & Gold Inc., has actually outperformed the LME copper price over both a three-year and five-year period, returning 21 per cent and 111 per cent respectively.

Copper declined 28 per cent in three years and posted a 103 per cent return over five years.

The annual copper market amounts to about 18 million tonnes so the ScotiaMocatta fund's hopes to acquire between 20,000 and 60,000 tonnes is unlikely to have much of an impact on the price.

However, the fund could affect LME warehouse stocks, which currently sit at about 205,000 tonnes.

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About the Author
Asia-Pacific Reporter

An award-winning journalist, Andy Hoffman is the Asia-Pacific Reporter for Canada's national newspaper, The Globe and Mail. More

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