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Copper glitters even more than gold
10/05/2010 11:30 am EST
On any weakness Freeport McMoRan Copper & Gold (FCX), Southern Copper (SCCO) or Taseko Mines (TGB).
All these stocks have been extremely strong lately and I expect that strength to reassert itself after any dip. Freeport McMoRan, for example, was up 29% from the low on August 25 through the close on September 29. Taseko Mines was up 29% during the same period. Even the laggard of the group, Southern Copper, was up 25%.
Some of these gains I’d mark down to the commodity traders. Hedge funds have moved almost as heavily into copper as they have into gold. Demand for copper as a bet on global economic growth and as a hedge against currency chaos has helped drive the price of copper on the London Metal Exchange to $8,045 a metric ton at the close of trading on September 29. That’s roughly a tripling in price since the start of 2009.
From this perspective copper at the moment is like gold--a bet on the macroeconomic future. With copper the bet is on continued declines in the dollar and an increase in demand from the global economy, in particular China.
Right now it looks to observers of the copper market that Chinese companies are running down their inventories in an effort to postpone buying at currently high prices. Chinese companies, London copper traders say, have enough inventory to get them through the end of the year before they have to begin buying again.
It’s on the supply side, though, that copper is different and a fundamentally better story, in my opinion, than gold.
Production at older copper mines—those opened in the 1980s-- is declining as miners dig their way through the richest ore bodies and begin to work lower grade ores. That means a company has to move and smelt more rock to get out the same amount of copper. That, of course, is more expensive, but at some mines it’s also not just possible. If a smelter has a capacity of 100 tons, that’s all the rock a miner can run through the smelter, no matter what the grade of the ore. With lower grades of ore containing less copper per ton of rock, production of copper falls.
Output from the world’s top four publicly traded copper producers declined by 12% in the first half of 2010.
Increasing production isn’t quite as simple as it sounds—even if you think that creating new mines in increasingly remote and weather-challenged locations doesn’t sound particularly easy. Not only does a company need to find a new deposit of copper, but getting the copper in that deposit has to be economically viable (we’re talking about building railroads and ports, for example), the ore has to be a higher grade than in existing older mines, and the political situation has to at least offer the mining company the ability to delude itself into believing that it stands a good chance of actually owning the concession by the time copper production starts.
All this means that when copper stocks go into rally mode again, I want to own pure plays in copper—Freeport McMoRan rather than BHP Billiton--with lower than average costs of production, and for the long term a decent pipeline of promising new mines under development.
That description would put Freeport McMoRan at the top of my list followed by the very volatile Taseko and then by Southern Copper.
I don’t want to buy any just yet. And I’ll have more on a specific pick if prices move the way I’d like them to—or when I give up waiting for even a mini correction in the industry.
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