Invest in copper, you’ll regret not having portfolio exposure
Structural trends ahead are electrification, renewables, EVs, increased travel and continuous, fast economic growth in developing countries with approximately 6 billion people. For all of that, you need copper.
On top of it, copper is in limited supply, to cater for the growth in demand, prices are bound to increase. This creates a very positive risk/reward investment opportunity.
Further, the current sentiment, based on a myopic view of the situation, is negative and copper miner prices are suppressed alongside other commodities.
Copper investing environment
The thing with copper (COPX) is that the market is betting
on prices going down in case of a global economic slowdown or recession. Given
that supply is relatively fixed, any change in demand would be very detrimental
for prices. In 2009 copper went below $1.5 per pound.
Furthermore, many miners leverage themselves, invest in
marginal projects and consequently, any kind of economic slowdown impacting
demand, makes things very ugly for the whole sector. So, oversupply leads to
low prices, but given the volatility of the sector, supply gaps lead to extreme
As investors, we have to look at the long-term balance, buy
miners when copper prices are below long-term sustainable levels and patiently
wait for prices to return above long-term balance levels. The key is to own
miners that will survive no matter what and buy them when their prices are
historically low. The Copper Miners ETF (COPX) is still 70% below 2011 levels.
article, I’ll explain my long-term copper investment thesis by
Demand for copper
Copper supply and supply restrictions
Long-term sustainable copper prices
The current valuation of copper miners
If you prefer watching to reading, enjoy my video.
Copper investment thesis – demand for copper
The Strategic Investment Advisor
Group recently held a Natural Resources day with industrial experts at the Hotel
Savoy Baur en Ville in Zurich. I will use many of their presentation charts to
put copper into a long-term, but also short-term perspective.
Demand for copper is more stable than perceived by those who
just look at copper prices. It is in line with global growth. I think we can
expect demand for copper to continue to grow at rates similar to global
Copper demand will stay strong, EVs or no EVs. Albeit I
consider EVs and electrification a nice added bonus. For example, in the recently
Dutch budget, the plan is to add 1.8 million charging stations. That will
require lots of copper, and if countries like Norway and the Netherlands are at
the forefront of what is going to happen, the future is extremely positive for
copper. The new Chinese 5-year plan and significant grid investments also
The thing is that copper is not easy to find anymore, it is
getting deeper and more expensive to mine. We see the operational issues Turquoise
Hill (TRQ) is having with its Oyu Tolgoi mine in Mongolia. Consequently, I
don’t think deep mining projects like Rio’s (RIO) Resolution
mine or Hudbay’s (HBM) Rosemont
project are feasible at current copper prices (no permit is a benefit for the
Investments in exploration have also been low over the past
years and all of the large mines have actually been found by our
The over-investment and under-investment cycles lead to the common
boom and bust cycles in the industry. The only thing we have to do is to buy in
a downturn and sell in a boom. A similar situation is happening within all
So, developed markets will continue grow on stimulus while
emerging markets on their natural forces, deserved growth and improvement out
Copper price forecast
As for copper prices, those
will average above cash mining costs plus a premium. Who would invest in a new
mine at a 5% internal rate of return? 20% is the minimum. This implies copper
prices at above $7,000 per ton for most new projects. The current price is
$5,700. This is at unsustainable lows. I assume average copper prices over the
next decade to be above $7,000 with spikes above $10,000. That is $3.18 per
pound with spikes to $4.5 as a minimum.
So, copper prices will spike,
but we have to time things very well, as it is possible for them to crash too.
A valuation of copper investments
Given the discrepancy between
the cyclically adjusted price to earnings ratio (CAPE ratio – that takes 10
years of earnings into consideration) and the S&P 500, it is time to be
overweight mining stocks in one’s portfolio. But, keep in mind and be prepared
for volatility. Own those miners that can’t go bust.
Given the low valuations, low investment environment, the
market’s negative sentiment for copper miners, I believe copper offers one of
the best risk versus reward investment opportunity in the current environment,
even if we have a recession in the coming years. A recession would subdue
prices temporarily but amplify the boom afterwards. Over the next 10 years, I
wouldn’t exclude gains between 300% and 1,000% on copper miners, depending on
the leverage and mining costs.
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