3 Copper Mining Stocks and ETFs that Will Benefit from China’s Bull Market

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As China’s economic recovery accelerates, copper prices are rising. Here are three copper mining stocks and ETFs that should benefit.

As the dust settles from November’s contentious U.S. presidential race, at least one major investment theme has emerged: China is likely to be a big winner in the months and years ahead. Here we’ll discuss the dramatic improvement to China’s equity market outlook in the election’s wake. In particular, we’ll focus on the assets that should be among the strongest beneficiaries of China’s bull market, namely copper and copper mining stocks.

With Joe Biden the presumptive winner of the White House, the forward-looking stock market has begun taking into account the dramatic shift in U.S.-China relations that is likely to occur under a Biden presidency. During Donald Trump’s presidency, trade relations with China were acrimonious, to say the least; Biden, by contrast, is widely regarded as being more China-friendly. Consequently, investors can probably expect to see a less strained U.S.-China trade policy in the years ahead.

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The extent to which investors warmed to the prospect of improved trade relations with China can be seen in the graph below. One of my favorite proxies for the leading large-cap Chinese ADRs is the iShares China Large-Cap ETF (FXI), which as you can see has established a solid upward trend since bottoming in March. But notice in particular that since the start of November—a couple of days before the election—FXI has shown unusual relative strength versus most segments of the U.S. broad market.

So far this month, FXI has gained nearly 10%, which is probably as much a celebration of China’s remarkable economic recovery as it is a reaction to the improved trade outlook. In any case, a new bull market in China equities is clearly underway.

Indeed, China’s economic growth accelerated by almost 5% year over year in the third quarter (up from the previous quarter’s 3.2%). The growth was led by a rebound in consumer spending on retail and luxury goods above pre-pandemic levels. What’s more, factory activity increased thanks to higher demand for exports of medical supplies. According to the Associated Press, “China is the only major economy that is expected to grow this year while activity in the United States, Europe and Japan shrinks.”

One of the most useful indicators for measuring China’s industry strength is the price of copper. As the world’s second-largest economy and largest industrial nation, China’s appetite for the industrial red metal is voracious. Copper is used in everything from electronics to smartphones to automobiles, with China accounting for nearly 50% of the world’s demand for the metal. Consequently, its industrial sector is a major driver of copper prices, and when prices are consistently rising it can be assumed that China’s industry is strengthening.

Along with the improving outlook for copper demand from China and other Asian countries, the market’s expectations of lower supplies from top copper miner Chile is another key driver of higher prices. Also worth mentioning is that copper is critical to the “clean” energy initiatives of the world’s leading nations. It’s also widely utilized in electric vehicle production and is essential to the 5G wireless revolution now underway.

Despite hitting a major low in March, the price of copper is up nearly 60% this year (see above chart). The consistent upward trend in copper prices in recent months has served as a leading indicator for China’s equity market, which in turn has important implications for stock investors. Specifically, the companies that mine copper and export to China are likely to benefit from China’s bull market in the coming months and years. Let’s take a look at some assets that should benefit from this optimistic outlook.

3 Copper Mining Stocks and ETFs to Buy

Copper Mining ETF: Global X Copper Miners ETF (COPX)

For ETF investors, one of the best vehicles for having some exposure to the China-sensitive red metal is the Global X Copper Miners ETF (COPX) which, in the words of the fund’s prospectus, “seeks to provide investment results that correspond generally to the price and yield performance…of the Solactive Global Copper Miners Total Return Index.” From a sector rotation perspective, it’s worth noting that COPX is currently in a relative strength position versus the S&P 500 Index and has outperformed the benchmark large-cap index for the last six months (suggesting that strong-handed institutional investors are bullish on this fund).

Copper Mining Stock #1: Southern Copper (SCCO)

Among the strongest performing U.S. copper producers is Southern Copper (SCCO), a leading integrated miner, smelter and refiner of copper, molybdenum, silver and zinc, with operations in Mexico and Peru. The red metal represented 82% of Southern’s sales in Q3, and while copper production registered a decrease of 2.3% (due to a decrease at its Peruvian mines), this was offset by a comparable production increase at its Mexican mines (due to higher ore grades). Southern reported a $506 million profit in the third quarter (up 27% from a year ago) on the back of a 15% sales increase to $2.1 billion.

Southern Copper (SCCO) is one of the best copper mining stocks today.

What’s more, Southern has set aside $6.3 billion in capital spending in the next three years, up from around $2.6 billion in 2018-2020. Management expects to produce 1.1 million tons by 2023 (compared to this year’s estimated 997,100 tons). On a technical note, Southern shares are currently extended from the 50-day line, but any pullbacks from here should offer a nice entry point for growth-oriented investors.

Copper Mining Stock #2: Freeport-McMoRan (FCX)

Freeport-McMoRan (FCX) is engaged in the exploration and production of copper, gold and other commodities in North and South America, as well as Africa. As one of the world’s top-four copper producers, Freeport stands to benefit from China’s economic rebound in the months ahead.

In the third quarter, Freeport saw impressive cash flow generation, with management expecting even higher free cash flow in the coming quarters as global copper production is expected to ramp up strongly next year. Its copper sales volumes in Q3 jumped nearly 7% to 848 million pounds, beating the firm’s July forecast by 7% (due to higher sales from its North American and South American mines). Capping off an impressive quarter were consensus-beating per-share earnings of 29 cents—a huge improvement from a year ago—and estimate-beating revenues that were 16% higher from a year ago.

Analysts anticipate further revenue increases in the next several quarters, as shown here. Freeport’s stock is a leveraged play on the copper price, with a 10% change in the red metal typically resulting in a 20% to 30% change in FCX.

Growing revenue estimates are what make Freeport-McMoRan (FCX) a top copper mining stock.

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Comments

  • Teck has long enjoyed a reputation of being well managed, so please don’t interpret its omission here as a repudiation of the company on my part. For this article, however, I focused mainly on the major producers that most investors have an easy familiarity with.

    Regards,

    Clif

  • Dear Mr. Droke,
    I respectfully do not agree regarding FCX as a choice.
    Please take a good look at Teck B. By almost every valuation measure it is better than FCX.
    In particular, Teck has a superior (and safer) Debt/Equity ratio, and a much more attractive Book Value.
    By the most modest estimate, Teck easily has room for about 16% more growth.
    In comparing the details of each balance sheet and income statement, as well as the path forward described by each management team, I would take Teck B. At this time I own what for me is a very good chunk of Teck.

    Sincerely,

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