- Copper prices are down about 20% from their recent highs.
- Despite correction, copper stocks should continue to gain as prices remain high
- Renewable and electric vehicles remain in demand
Globally, the bearish game continues in the minds of investors. As a result, copper prices retreated from trading around $4800 to its current level of around $3,900 a tonne. Despite these apprehensions, copper prices should remain bullish as copper supply remains tight. Additionally, if the monetary tightening trend ends in the near future, copper prices may rise sharply. In addition, analysts estimate that copper supplies will be short by around 100,000 tonnes in 2022, despite a 43% year-on-year increase. It should be noted that analysts had earlier estimated a glut of 50,000 tonnes.
The two most important sources for growth in demand are renewable and electric vehicles. Strong demand continues for solar panels, windmills and electric vehicles, and on top of strong demand is a backlog of orders due to recent semiconductor shortages, which is only exacerbating the shortage.
Despite the shortage, fears about a slowdown continue to affect prices, and countries like China, which has been the biggest consumer of copper, continue to stay out of COVID. Furthermore, the Chinese real estate market is increasingly facing a significant downturn, as housing demand has fallen off a cliff. Therefore, despite the gap between supply and demand, copper prices may remain under pressure in the near future.
Despite weighting issues on copper prices, copper stocks may still see some upside as valuations remain fair and earnings growth is likely to continue during the year.
Consider the following copper stocks as part of your portfolio
Southern Copper (NYSE: SCCO), is a copper company based in Phoenix, Arizona, with operations in North and South America. The stock is down 33% from its recent high as investor fears are weighing on the market sentiment. Southern Copper’s dividend yield is 9% and it trades at a price-to-earnings (P/E) of 11.
The company saw a fair quarter, with revenue growth in the high single digits and a 2.47% increase in net profit. Management has directed that revenue and profitability will improve as the Tocapala and La Caridad mines come back online during the next few quarters. The company anticipates projects totaling about 922,000 tonnes for the year, and with the new sites coming online at the end of the year, production will top 1 million tonnes in 2023. In addition, when the mines mature at the end of the decade, production could increase to about 1.8 million tonnes. The stock may just be right for investors who are looking for a company that has a deep stock of assets and steady cash flow.
Freeport-McMoRan (NYSE: FCX) is an American mining company based in Phoenix, Arizona, with operations in several countries, including Indonesia, where it produces copper and gold. and in North America and South America, where it produces copper. Freeport has seen significant growth in revenue and profits during the most recent quarter due to higher production and commodity prices, as revenue grew 36% and net income grew 112% annually. The stock is currently trading at a P/E of 9, but has a low dividend yield of 1%. Net profit margin is expected to come in around 20%, and revenue is expected to come in at $6-6.5 billion for the year.
The stock is down 42% from its 52-week high since it was reported by management during the last earnings call. Copper production is likely to be down about 1%. Management has also directed that operating costs are likely to increase due to an increase in energy and other commodity-related expenses. Regardless, the stock remains cheap, and the 1% lower guidance could quickly turn positive by the end of the year. Earnings are expected to grow in the high single digits during the year, bringing forward P/E at approximately 8x earnings. On the other hand, assuming copper prices are moving up, the P/E could be as low as 6-7x. But, even if the prices remain the same, they will be much higher than in 2019. Freeport’s stock is largely oversold and is an interesting idea for investors who want to dip their toes in copper stocks.