You Have Been Cleared for Re-Entry Into Copper

Disciplined long-term investors may scarcely have noticed, but prices for both copper and the shares of companies that produce it were swept into weakness along with the broader commodities sell-off that gripped the markets in recent weeks.

Observing an uncommonly bullish pairing of both near-term and long-term factors influencing copper supply and demand, I urged Fools back in December to consider copper as a compelling investment opportunity for 2011 and beyond. Ever the uncanny oracle for anticipating near-term market swings, Goldman Sachs then issued advance warning for a dip in prices across multiple commodities in April, and singled out copper as "vulnerable to slowing observed demand." Call it a Foolish sixth sense, but I closed my bullish CAPS pick for the Global X Copper Miners ETF (NYSE: COPX  ) a few days before that warning was issued.

Now, just weeks after sounding the alarm, Goldman Sachs is back to sound the all-clear for commodities; particularly copper, zinc, and oil. With that call, Goldman reiterated the very same 12-month price target for copper ($11,000 per ton) that the bank initially forecast back in December, and called the malleable metal "an attractive opportunity." One might reasonably interpret the past six months, then, as something of a head-fake that inserted a pause into the long-term upward trend.

Copper's mounting supply crunch
No doubt contributing to Goldman's abrupt about-face, Barclays Capital reveals that first-quarter copper production from the world's major mines came in substantially lower than analysts had anticipated, forcing a downward revision of full-year 2011 mine supply from 16.1 million tons to 15.7 million tons. Barclays Capital concludes that "although expectations were broadly in agreement for stagnant mine supply growth in 2011, the outturn of available data so far points to an even worse picture evolving which should offer some upside support to copper prices."

Exacerbating supply concerns, the political landscape for mining in Peru -- the world's second-largest copper producer, after Chile -- is becoming increasingly problematic. That miners' unions are poised to initiate a strike within days is not by itself unusual -- not by a long shot -- but coupled with an ultra-high-stakes run-off presidential election on June 5, uncertainty abounds. Peruvian authorities blocked Southern Copper's (NYSE: SCCO  ) proposed Tia Maria copper mine, while anti-mining protests in select regions have reportedly prompted bureaucratic responses that could delay mine permitting procedures.

The bullish long-term outlook for global copper demand that led Joy Global to call copper "the commodity with the strongest fundamentals" remains fully intact. Against that backdrop of expanding demand lies the true crux of the supply crunch: a declining average ore grade, reflecting Freeport-McMoRan Chairman James Moffett's noteworthy assertion that "the major copper reserves that are being produced today come from 100-year-old mines, with few exceptions."

5 ways to play
Accompanying the 23% increase in the price of copper that Goldman Sachs anticipates over the next 12 months, Fools would be wise to anticipate significant outperformance of the market by quality low-cost copper producers. With multiple vehicles to choose from, the next obvious step is to identify the likely outperformers from within the world of copper.

For those preferring a basket approach through a copper equity ETF, I must concede that a closer look leads me to prefer the First Trust ISE Global Copper Index Fund (NYSE: CU  ) over the Global X Copper Miners ETF. Led by enticing top-three positions in Freeport-McMoRan Copper & Gold (NYSE: FCX  ) , Rio Tinto (NYSE: RIO  ) , and Ivanhoe Mines (NYSE: IVN  ) , the First Trust vehicle is more heavily weighted in stocks that I would hasten to recommend individually in their own right. Foolish stock pickers, meanwhile, will wish to recall that Taseko Mines (AMEX: TGB  ) continues to pursue multiple paths to prosperity, including its recent decision to execute an ambitious phase three expansion plan for its 75%-owned Gibraltar copper and molybdenum mine.

I am standing behind this particular bullish call by adding the First Trust ISE Global Copper Index Fund to my silverminer CAPS portfolio. If you haven't already joined in the fun by creating a dream portfolio of your own, what are you waiting for? Once you create your CAPS account, click here to cast your own vote on the future performance of this copper-specific equity ETF.

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Taseko Mines. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (7) | Recommend This Article (23)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 26, 2011, at 10:22 AM, Jbay76 wrote:

    Sinch, with the topic of copper being discussed, where does Copper Fox Metals lie in it all?

  • Report this Comment On May 26, 2011, at 10:32 AM, XMFSinchiruna wrote:

    JBay,

    ... on the short list of the sector's most exciting investment opportunities.

    Disclosure: I am long Copper Fox Metals.

  • Report this Comment On May 26, 2011, at 11:52 AM, golddlog wrote:

    Chris, I had a stake in TGB and made a good profit after selling it a while back at $6.10, but don't have the faith in Prosperity being approved the 2nd time around. I held thru the sizable pullback in October on the bad news and it wasn't much fun. Where do you think we stand with TGB as far as Prosperity is concerned and how much of the SP is accounted for in Gibraltar. Management seemed to be a little presumptious on the approval and now the future hangs in the balance because of the "short cut" on the Fish Lake tailings pond. They claim the price of copper at the time made it only feasible to use Fish Lake and now the economics are more favorable to save it at an added cost to the project. Seems a little......fishy. should I be looking at Copper Fox instead. I know your busy so add whatever two cents worth you have time for.

    Still waiting patiently for Tyhee write up. I know we are a demanding bunch of fools! Thanks for all your hard work and looking forward to the bus trip!

    How about we take the ice road truckers route to the NW territory and check out Yellowknife.

    Pat

  • Report this Comment On May 26, 2011, at 12:20 PM, Jbay76 wrote:

    Good to hear!

  • Report this Comment On May 26, 2011, at 1:11 PM, Gonzhouse wrote:

    Taseko is worth a long look if for no other reasons than the expansion into moly at Gibraltar and the looming price increases in copper. But like golddlog, I'm curious (and hanging onto Taseko) for Prosperity. The likely reason mgmt hasn't mentioned Prosperity is because the next step is up to the Canadian environment dept that must pass judgment on the revised plan. Any idea on a timeline for Judgment Day?

  • Report this Comment On May 26, 2011, at 1:45 PM, XMFSinchiruna wrote:

    Gonzhouse and golddlog,

    Do not overlook that niobium discovery either. That was a major find.

    I have no precise timeline for you on the re-evaluation of Prosperity, but I too remain long the shares in part on speculation that a deposit that large will not go untapped.

  • Report this Comment On May 26, 2011, at 4:47 PM, Dmama wrote:

    Thank you for your insight into copper and mining stocks. It's a volatile field but seems quite promising in light of current dollar trouble. Nice to have some guidance in sorting out the leaders from the rest of the pack.

    I REALLY love the fact that you back up your article with an actual pick! Good work.

    Dmama

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