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Canadian copper miners set to lose some shine in 2013

Rising production of copper in 2013 is expected to create a surplus of the metal for the first time since 2001, depressing the outlook for its price and Canadian mining stocks.

A recent report from the International Copper Study Group estimated that the production of copper will climb more than 6 per cent next year while demand is set to rise by only 2.4 per cent. If that comes to pass, the oversupply will cause a glut that would push the commodity price lower in the latter half of the year.

Investors in Canadian copper miners will have to tread carefully in 2013. Andrew Shaw, Singapore-based Head of Bulk Commodities Research at Credit Suisse, believes that copper prices will peak in the second quarter of the year at $3.76 per pound (U.S.) before beginning a steady decline to $3.36 by the end of 2014 (see chart at left).

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The expected 40-cent-decline in copper prices does not sound large but it will have a major effect on revenues for some Canadian miners. Companies such as First Quantum Minerals and Taseko Mines, which generate over 90 per cent of sales from copper, will take a 10-per-cent hit to top-line growth. Slightly less severe losses to growth would occur at Capstone Mining, Inmet Mining and HudBay Minerals.

Sustained lower prices have historically resulted in the shutting of less profitable mines and lower production, further hurting revenues and profits in the sector, at least in the shorter term. Over the long haul, the lower production levels pave the way for eventual shortages that can push commodity prices higher. For now, however, Canadian holders of copper-focused mining stocks should consider reducing positions in the first half of 2013 in anticipation of lower profits.

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