3 Copper Mining Stocks and ETFs Benefitting from China’s Bull Market - Cabot Wealth Network

3 Copper Mining Stocks and ETFs Benefitting from China’s Bull Market

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As China’s economic recovery accelerates, copper prices are rising. And these three copper mining stocks and ETFs are getting a big boost.

As the U.S. economy walks along the road to recovery following last year’s Covid-related shutdown, at least one major investment theme has emerged: China is likely to outpace the U.S. in terms of economic performance in the years ahead. Here we’ll discuss the dramatic improvements to China’s economy and equity market outlook in Covid’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.

After a rough quarantine period early last year, China was the first major country to recover from the pandemic. Indeed, by the end of 2020, it was pretty much business as usual for the world’s second-biggest economy—even as the rest of the world continued to struggle with lockdowns and other virus-related restrictions.

In fact, according to Bloomberg, China’s economy is booming after experiencing record growth in the first quarter of 2021, thanks in part to “strong exports and rising business confidence supporting the recovery.”

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Trade reports heralded China’s trade surging in the first quarter, with overseas demand driving an increase in both imports and exports. (Exports rose nearly 40% in yuan terms, while imports were up almost 20% from a year ago.)

The extent to which China’s business outlook has improved can be seen in the following graph. It features the benchmark Shanghai Stock Exchange Composite Index (SSEC), which has established a solid upward trend since hitting a crash low over a year ago.

But notice in particular that since the start of last June, the SSEC began showing relative strength versus most major world stock markets. While this year may have brought about a period of consolidation, SSEC’s ability to generally keep above the psychologically significant 200-day line is a sign that the bulls remain in control of China’s equity market.

Since last March’s crash low, SSEC has risen about 25%, which is probably as much a celebration of China’s remarkable economic recovery as it is a reaction to its improved trade outlook. In any case, a new long-term bull market in China’s stock market is clearly underway.

Even more than its stock market, one of the most useful indicators for measuring China’s industrial 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.

Since hitting a major low in March 2020, the price of copper is up almost 100% since on high demand and supply concerns and remains near its highest level in over a decade. The upward trend in copper prices in recent months and ongoing support at the 200-day line has served as a confirming indicator for China’s equity market, which in turn has important implications for mining 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 year (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 represents around 80% of Southern’s sales, and management believes that the infrastructure package announced by the White House will “significantly increase the demand for copper, which is a fundamental element at green energy facilities.”

In Q2, Southern reported revenue of $2.9 billion, up 62% from a year ago, thanks to higher prices for copper, silver and zinc.

What’s more, Southern has set aside over $6 billion in capital spending in the next three years, up from around $2.6 billion in 2018-2020. Management expects to produce over one million tons by 2023 (compared to last year’s estimated 997,000 tons).

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.

Freeport is benefiting from some pretty significant tailwinds right now. One of those tailwinds is higher copper prices, which are up 85% since last April. This has provided Freeport with a higher average realized price for the red metal. But the company is also benefiting from gold, with sales 9% above the company’s guidance in Q4 (the most recent Q2 report of 66% gold sales growth vs. the year-ago quarter is a positive but easy comparison due to last year’s pandemic related shutdowns).

Looking ahead, management projects a copper sales increase of 20% over 2020, with gold volumes expected to rise by more than 50%—even as production remain low. The company’s quarterly dividend has also recently been reinstated, tying a nice bow on an otherwise attractive package.

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*This post has been updated from an original version, published in 2020.

Comments

  • Investor F.

    There has been comments by Barrick Gold CEO of his interest in acquiring FCX, Barrick Stock recently purchased by Warren Buffet, FCX has big labor problems in their Indonesian mines

  • 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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