- Copper prices are down around 20% from their recent high.
- Despite the correction, copper stocks should continue to benefit as prices remain elevated
- Demand continues to be for renewables and electric vehicles
Copper outlook
Recession continues to play on the minds of investors globally. As a result, copper prices have retreated from trading at around $4800 to their current levels of around $3900 per tonne. Despite these fears, copper prices should remain elevated as copper supply remains tight. Additionally, if the trend of monetary tightening were to end in the near future, copper prices could quickly head back up. Furthermore, analysts predict there will likely be a deficit of around 100,000 tonnes in 2022 despite copper supply increasing by 43% y-o-y. It should be noted analysts had previously estimated a 50,000-tonne glut.
The two most significant sources for the increase in demand continue to be renewables and electric vehicles. Solar panels, windmills, and electric vehicles continue to witness strong demand, and on top of the strong demand is a backlog of orders due to the recent semiconductor shortage, which is only exacerbating the shortage.
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Despite the shortage, fears about recession continue to plague prices, and countries such as China, which has been the biggest consumer of copper, continue to limp out of COVID. Furthermore, the Chinese real estate market seems to be quickly facing a significant downturn, as demand for housing has fallen off a cliff. Therefore, despite the difference between supply and demand, copper prices may remain under pressure for the foreseeable future.
Despite the issues weighing on copper prices, copper stocks may still provide some upside as valuations remain reasonable and earnings are likely to continue to rise during the year.
Consider the following copper stocks as a part of your portfolio
Southern Copper (NYSE: SCCO) is a copper company based in Phoenix, Arizona, with operations across North and South America. The stock is down 33% from its recent high as investors’ fears continue to weigh on market sentiment. Southern Copper has a dividend yield of 9% and trades at a price-to-earnings (P/E) of 11.
The company witnessed a reasonable quarter with revenue increasing by high single-digits and net profit increasing by 2.47%. Management has guided that revenue and profitability will improve as the Toquepala and La Caridad mines come back online during the next couple of quarter. The company projects total projects to be around 922,000 tonnes for the year, and after new sites come online at the end of the year, production in 2023 will top 1 million tonnes. Furthermore, when mines mature at the end of the decade, production may increase to around 1.8 million tonnes. The stock may just be right for investors that are looking for a company with a deep reserve of assets and steady cash flow.
Freeport-McMoran (NYSE: FCX) is an American mining company based in Phoenix, Arizona, with operations in multiple countries, including Indonesia, where it produces copper and gold. And in North America and South America, where it produces copper. Freeport has witnessed a significant increase in revenue and profits during the most recent quarter on the back of higher production and commodity prices as revenue surged by 36% and net income surged by 112% y-o-y. The stock currently trades 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 from its 52-week high by 42% ever since management stated, during the previous earnings call. that production for copper is likely to be lower by around 1%. Management has also guided that operating costs are likely to increase due to an increase in energy and other commodity-related expenses. Regardless, the stock remains inexpensive, and a 1% lower guidance could quickly turn positive by the end of the year. Earnings are expected to rise by high single digits during the year, putting the forward P/E at around 8x earnings. On the other hand, suppose copper prices remain elevated forward, P/E could go as low as 6-7x. But, even if prices remain where they are, they would still be much higher to what they were in 2019. Freeport’s stock is quite likely oversold and remains an interesting consideration for investors who are looking to dip their toes in copper stocks.