Canadian mining stocks have fared quite well over the last five years. In fact, the S&P/TSX Metals and Mining Index rallied 65% in this time period as it recovered from cyclical lows. This might have you wondering if now is a good time to buy mining stocks or if you’ve missed your chance.
Let’s explore.
When do Canadian mining stocks outperform?
Commodities like copper, iron ore, aluminum, and zinc perform well when the economy is expanding. This would explain why mining stocks have done well in the last five years. Thus, your view on mining stocks will depend very much on on your view of the economic outlook.
But it’s not that simple. Base metal prices, and therefore, stocks, are affected by both demand and supply forces. This means that the state of the economy only moves half of the equation, the demand side. The supply side can be a just as strong, if not a stronger force affecting base metals prices.
My personal opinion on the economic outlook is not as bullish as many. This doesn’t mean that there are no good stock opportunities, it just changes the type of stocks that I will invest in. Because no matter where we’re at in a cycle, there are always good stock investment opportunities.
Copper
Copper is the most conductive non-precious metal and this makes it indispensable for many industries, such as building construction, electrical and electronics, and transportation and equipment. It is therefore known as one of the purest economic indicators.
While my economic outlook means that Canadian mining stocks as a whole are not that appealing to me, there is an exception – copper. This is because the world is already producing less copper than it consumes, and this is expected to worsen in the years to come.
Copper has two major positive things going for it at this time. First, on the demand side, copper has gotten a boost as the metal of electrification. The amount of copper needed for renewable energy systems is 6 times that of traditional energy systems. It’s also a critical component in electric vehicles. Also, copper demand is expected to significantly increase in the artificial intelligence boom.
On the supply side, copper is structurally undersupplied, for a variety of reasons. Cutbacks in Chinese production, as well as the shut down of one the largest copper mines in Panama are among the reasons. Surprisingly, there is not a lot in the way of investment to change this. And even when the investment occurs, it would take a lot of time to see additional supply.
So, we’re left with this deficit.
Teck benefits from rising copper prices
Teck Resources Ltd. (TSX: TECK.B) is a $34.5 billion globally diversified mining and metals company. It has operations in places such as Canada, the U.S., Chile and Peru. The company has major positions in copper and zinc. Teck has sold off its Fort Hills interest as well as its steelmaking coal business, which is expected to close this year. At that time, Teck will have emerged as a more focused company, with a strong focus on growing its copper business. Just in time for what is expected to be a very strong copper market in the coming years.
Teck’s most recent result (Q4/23) was still dominated by its steelmaking coal business, which has been sold, so soon will no longer be a factor. So, let’s focus on the copper business. As Teck ramps up its copper production, we can expect the company to be a beneficiary of the bullish copper market. Copper prices are up approximately 11% year to date and 17% from February lows. This, along with Teck’s record copper production, which increased 58% in the quarter, will drive Teck’s results going forward.
