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Invest in Copper if you Believe in Growth

Steel demand makes big headlines because of the metal's role in everything from buildings to automobiles and washing machines. However, every one of those also needs copper to make it work. And copper also goes into developed world staples like electronics. That's why copper miners like Freeport-McMoRan Copper & Gold (NYSE: FCX  ) and Southern Copper Corp  (NYSE: SCCO  ) are worth a closer look.

Vital to progress
Copper is used in the construction, electricity, transportation, and industrial machinery spaces, among others. These are some of the most important driving forces as countries develop. For example, new buildings get erected to house people moving to cities to work at factories using new equipment to produce export products. And, of course, all of those new city dwellers use some form of transportation and electrical power.

It's no wonder that China and the rest of fast-developing Asia, consume around half of the copper used in the world. But don't forget that copper is also integral to the gadget on which you're reading this article—which was probably made in Asia and exported to the United States, or wherever you may reside. In other words, the world needs copper to grow and to function on a day-to-day basis.

Big reserves
Mexico and Peru account for Southern Copper's nearly 60 million tonnes of reserves. That makes the miner the largest copper player in the world based on reserves, trailed by Freeport-McMoRan Copper & Gold's roughly 40 million tonnes and BHP Billiton's (NYSE: BHP  ) 25 million tonnes. Equally impressive is the fact that Southern Copper's mine life is more than twice that of its next closest competitor.

Copper makes up over three-quarters of Southern Copper's business. At diversified mining giant BHP Billiton, copper accounts for just under 20% of sales. Far more important to the company is iron ore (used to produce steel), which makes up about a third of the top line, but about half of earnings before interest and taxes, or EBIT. Copper accounts for just under 20% of EBIT.

Clearly for BHP, iron ore is the driving force, and copper is an important side business. Copper, meanwhile, is a key business for Freeport-McMoRan, representing about 80% of its mining revenues. Based on the amount of copper the company sells, it is the largest publicly traded producer, though its reserves lag behind those of Southern Copper. A year ago, that would have made copper close to the only business for Freeport—but not today.

Earlier in the year Freeport-McMoRan bought its way into the oil and gas sector via the acquisition of Plains Exploration & Production and McMoRan Exploration. After this $19 billion transaction, oil and gas drilling now makes up about a quarter of Freeport's business. Copper is now about 60% of the company's total business, about 75% of which is mining related.

So while copper is still the most important sector at the company, Freeport is starting to look more like BHP on the diversification side of the equation. That's not a bad thing, but it makes Freeport less of a pure play on copper than it once was, leaving Southern Copper the cleanest option for direct copper exposure.

Diversification helps
The entire mining industry, however, has been struggling of late with generally weak pricing across the board. For example, Freeport-McMoRan's copper sold for nearly 10% less year-over-year in the third quarter. Despite this, however, Freeport shares are up about 6% this year compared to a 25% drop at Southern Copper. Freeport's price started to head higher after it closed on its oil and gas purchase.

FCX Chart

FCX data by YCharts

While Southern Copper is clearly the purest play of the large copper miners, Freeport's diversification efforts have already benefited shareholders. BHP Billiton, meanwhile, is really a play on iron ore. That said, despite copper making up only about 20% of its business, it remains one of the big players in the copper space.  

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Related Tickers

9/23/2016 4:02 PM
BHP $32.54 Up +0.08 +0.25%
BHP Billiton CAPS Rating: ***
FCX $10.63 Down -0.35 -3.19%
Freeport-McMoRan C… CAPS Rating: ****
SCCO $25.96 Down -0.31 -1.18%
Southern Copper CAPS Rating: ****