The industrial metal has a very bright future
Thursday 04 Jul 2019 Author: Yoosof Farah

If you’re an investor in copper, you would have had a tough time in the past decade. The price of the metal has almost halved compared to a decade ago, and some people think the price won’t pick up soon thanks to a dodgy global environment.

It begs the question why you would bother investing in it. Read on and we’ll explain why.

Copper is used in practically everything – wiring, transport, construction, the power grid, etc. It is seen as a bellwether for the global economy.

That’s why the price is currently down, as investors are nervous about the world given the US is picking fights with China and Iran, and many economies across the globe aren’t developing as well or as quickly as people thought.

It’s also why gold has rocketed to a six-year high, with worried investors – central banks among them – looking to stockpile the precious metal in case things take a turn for the worse.

In this article we will explore why copper has brighter prospects than many believe and discuss some of the ways you can get exposure.

Playing copper through exchange-traded funds

Most exchange-traded funds tracking copper are very risky, as they are leveraged products.

When the price of copper goes up, a leveraged ETF’s value will go up two or three times more than the copper value. But likewise it will fall by two or three times more when the copper price drops.

The only ETF available to UK investors to play copper without that level of risk is WisdomTree’s ETFS Copper (COPA). WisdomTree says it has seen a lot of people buy into the ETF in recent months as people are confident on the long-term prospects for the base metal.

This ETF tracks the Bloomberg Copper Subindex Total Return Index, which is comprised of longer-dated copper futures contracts.

FORGET THE GLOOM

A growing number of experts who track the metals space say you should forget the gloom, because the fundamentals underpinning copper are strong and its price is set for a big increase over the long-term, regardless of what happens in the latest ding dong between various international heavyweights.

One of these experts is Olivia Markham, co-portfolio manager at BlackRock World Mining Trust (BRWM), which invests in several copper-producing miners and has a 20% allocation to pure-play copper stocks in its portfolio.

Markham believes there is a big ‘disconnect’ between the current price of copper and its underlying value, which is driven by the fact that copper is at its largest net short position in 13 years.

That means more investors (mostly hedge funds) are betting that the price of copper will fall than it will go up.

In the copper futures market, where buyers and sellers agree on a price to buy copper at a set time in the future, there has been a net short position of 46,000 contracts

‘It’s a reflection of people’s negative view on global growth, global demand, the US China trade tensions, etc,’ she explains.

‘Of all the commodities, copper tracks much closer to global growth and investor sentiment, unlike iron ore for example which tracks closer to its true supply and demand fundamentals.’

BIG DEFICIT

When it comes to copper supply and demand, while there is a small surplus in supply at the moment, this is expected to fall into a deficit later this year, with the deficit expected to continue getting wider as demand grows.

Sandfire Resources, an Australian mining firm which recently agreed to buy UK-listed copper miner MOD Resources (MOD), forecasts the copper deficit to hit 4.8m tonnes by 2028.

Around 23.6m tonnes of copper was used worldwide last year, and in 10 years’ time demand is forecast to increase to 29.8m tonnes. 

Sandfire’s figure is based on the copper available from current mines and contributions from old ones which are brought back into operation.

To meet demand new mines are needed from greenfield sites, i.e. sites which haven’t been mined before. These are a lot more risky for miners to develop and can be very expensive.

Part of the reason for the probable lack of adequate supply going forward is down to the fact it’s simply not economical for most miners to develop new projects.

Markham says: ‘It’s become harder to find new copper deposits. The ones that are there are lower grade, and in difficult jurisdictions.

‘Expect the copper supply longer term to be in deficit. And demand continues to grow at a rate of around 1% to 2% of GDP. It comes down to the whole story around electrification – demand for electric vehicles, electronics and upgrading the grid infrastructure.’

KEY MARKET DRIVES

Nitesh Shah, a research director at exchange-traded fund (ETF) provider WisdomTree, believes the latter point – upgrading the grid infrastructure – is the key factor that will drive copper demand.

‘Wiring is a very big thing,’ he says. ‘The grid infrastructure in all these developed countries needs upgrading, and then you’ve got all the developing countries, and cities becoming major cities for the first time, which all need to build and improve their grid infrastructure.

‘All of that requires copper wiring, so that demand is not going away any time soon.’

In addition, electric vehicles are expected to be a big boon for copper, with anywhere between 40 kilogrammes (kg) to 90 kg required for electric cars, and a whopping 370 kg needed for an electric bus according to the Copper Alliance.

There were 5m electric vehicles on the road last year. The International Energy Agency has forecast this number to reach 130m by 2030.

‘That’s an exponential increase in 12 years,’ says Shah, who adds that for all such expansion in electric vehicles on the road to take place, 1.8m tonnes of copper will be needed. Right now, there’s around 200,000 tonnes going into such vehicles.

While copper investors will be rubbing their hands with glee, it won’t be good news for Tesla.

When the electric carmaker moaned in May about how it foresees a shortage in key materials for its cars – copper being one of them – the share price of copper-producing miners jumped, including Anglo American (AAL) and Antofagasta (ANTO).

More comments from car manufacturers about such shortages could also help the copper price, and that of shares in copper miners, to keep rising.

CHINA IS KEY

Key to the rise in copper demand will be China, which will be at the forefront of world demand because as it gets wealthier people will, naturally, want more of everything. And practically so many things feature copper.

According to analysts at BCS Global Markets, last year China accounted for 50% of the world’s entire copper usage. A decade earlier the figure was 29%.

‘Everything depends on China,’ says BCS analyst Oleg Petropavlovskiy. ‘If the Chinese economy is doing well, the copper price will go up. But if there’s weak economic data from China, then we’ll see another decline in copper prices.’

While the growth of China’s middle class is a story expected to continue for decades, and which some say is ultimately the key to copper’s long-term price growth, Petropavlovskiy suggests not getting too carried away with copper prices and shortages, and foresees supply to keep growing, albeit at a low rate.

‘We’ve been told copper deposits are getting smaller and copper grades are falling. I’ve heard this for 11 years. But in my experience, it has not been happening,’ he says.

‘[Copper] supply will be growing by 2% to 3% in the next few years, but if consumption in China falls, then the price of copper will go down.’

NOT FOR THE FIRST TIME

As Petropavlovskiy intimates it’s important to note that this isn’t the first time people have got excited by copper.

The metal was meant to do well under Trump, especially after he vowed as a presidential candidate to spend $1trn on infrastructure.

As is the case with any election anywhere in the world, beware of candidates’ promises.

That was in 2016, and now two and a half years into his presidency, the US Congress is still debating whether or not to authorise such a plan, let alone start building.

Many in the copper industry waited eagerly for the metal’s price to rise after Trump got elected. Roughly 900 days later, and the price is now lower.

But this current wave of excitement among some investors is different given economic trends are pointing to a long-term upswing in copper’s price, and those who watch this commodity all agree the fundamentals are sound.

If you buy this argument, then how can you invest in the theme? There aren’t many copper-related investment fund or trust options out there, and the ones that are available either have poor performance or only have a small exposure to copper in their portfolios.

A better option could be to invest in copper miners. These businesses can benefit from an increase in copper prices with the added bonus of further gains if they make operational progress. However, you are also exposed to geopolitical, financial and operational risks.

We now discuss three London-listed mining companies offering exposure to copper.


Antofagasta (ANTO) 923.4p

A constituent of the FTSE 100, Antofagasta is the biggest pure-play copper miner on the London Stock Exchange, and operates in what is considered a low-risk jurisdiction with all of its mines in Chile.

The business itself is considered by analysts at Jefferies as the lowest risk play on the copper price, as it has a strong balance sheet with low net debt, and a conservative management team and board of directors who aren’t minded to take big risks.

It also has a good track record of paying both ordinary and special dividends to shareholders throughout the market cycle.

The company’s shares fell by nearly 20% in a two-month spell between the middle of April to June, as the copper price went down to ‘near-recessionary levels’, according to Jefferies.

The share price has since recovered around 10%. Even a small increase in demand for copper should help push the shares higher.

It has a number of low-risk growth opportunities available with extensions to its existing mines, and its pre-tax profit is forecast to increase steadily over the next five years. Antofagasta is our top large cap copper pick.


KAZ Minerals (KAZ) 600.8p

Focused on large scale, low cost open pit mining in Kazakhstan, KAZ Minerals is another big, pure-play copper company.

KAZ has historically been focused on large scale, low cost, open pit mining. It operates the Bozshakol and Aktogay open pit copper mines in the Pavlodar and East Region of Kazakhstan, three underground mines and associated concentrators in the East Region of Kazakhstan and the Bozymchak copper-gold mine in Kyrgyzstan.

The shares were hit last summer when it unveiled a $900m deal to buy a copper project in a remote part of eastern Russia. 

BSC Global Markets analyst Oleg Petropavlovskiy says the main issue for KAZ is that the port near the mine in Russia is both small and already operating at full capacity.

There are other miners in the area – big ones such as Kinross and Polymetal (POLY) – but they’re all in gold, which means they can get their product out through helicopters. KAZ on the other hand is the only copper miner, and so itself has to build an extension to the port.


Central Asia Metals (CAML:AIM) 213.5p

Central Asia Metals is a favourite with investors thanks to its historically generous dividend.

While its share price has dropped from a high of 266p in April, a lot of that is to do with the market recently being disappointed in a 12% cut to the dividend to 14.5p.

The company changed its dividend policy to make it more sustainable, reflecting the fact it has become a larger company with higher capital requirements since acquiring a lead/zinc mine in 2017. Nonetheless, its dividend yield still stands at a generous 5.5%.

While the company is ambitious to keep growing, its management have a track record for being incredibly conservative with their growth plans to ensure they’re creating value for shareholders and not being reckless in the pursuit of growth.

It has mines in Kazakhstan and North Macedonia, with a licence to run the former until 2034, and a mine-life of 20 years on the latter.

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