Supply/demand fundamentals of the copper market are both moving in the right direction, laying the groundwork for continued strength in copper prices, and of course copper stocks.
Manufacturing unexpectedly rose in China
Numbers out of China continue to be positive. Given that China is the biggest consumer of copper, representing 40% of global consumption, this is very good news for the commodity. A factory index released today by HSBC Holdings Plc and Mrkit Economics showed a preliminary reading of 50.1 for August, compared with a median estimate of 48.2. Not only is this above expectations, but it is also above the threshold of 50, which signals growth. Furthermore, net imports are up 12.65% versus last year. These figures are indicative of strong demand.
Inventories Continue to Decline
Helping to build the bullish case, copper inventory stockpiles are decreasing at a fast pace and are lower by 16% since June. Supply is low.
Risks
As with everything in life, there are risks that we must keep an eye on. Global mine output in the second quarter was up 8.4% from the same period in 2012. And we must continue to watch the data coming out of China. Numbers in the past have been misleading and a short term trend does not always translate into a real turnaround.
Stocks That Will Benefit
Should these dynamics continue to work in coppers favour, this collection of companies is set to benefit:
First Quantum Minerals (TSX: FM) – 80% of its production is from copper, and therefore are assured to benefit from improving copper fundamentals. Most interesting about this company is the fact that they were free cash flow (defined as operating cash flow minus capital expenditures) positive in the latest quarter, and they are highly profitable with low cash costs.
Lundin Mining (TSX: LUN) – with 58% of its production coming from copper, Lundin will also benefit. The company is not in as good financial shape as First Quantum, but management’s plan is to reduce or defer capital spending until copper prices recover.
HudBay Minerals (TSX: HBM) – although slightly less levered to the commodity, with 31% of its production from copper, the stock is currently trading essentially at the value of its cash per share. The company has a cash balance of $1.07 billion or $6.26 per share.
The Bottom Line
Rising investment in copper intensive projects such as providing electricity to rural areas and railway expansion mean China’s refined copper consumption should see a healthy rise this year. Estimates indicate an increase in Chinese copper consumption of 9.1% this year, up from 5% growth in 2012. This is music to the ears of the three companies mentioned above.
Another resourceful opportunity
Though copper may be poised for a rebound, there is another resource that potentially offers a more significant opportunity. Instead of copper, your portfolio could be best served by uranium – the key ingredient for nuclear power. Not only is uranium in demand in places like China, but its price isn’t quite as headline driven, which could make it a more valuable commodity to secure your portfolio.
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Fool contributor Karen Thomas does not own shares in any companies mentioned. The Motley Fool doesn’t own shares of any of the companies mentioned at this time.
