Copper was Tarnished Around the World in 2013 but 2014 Could Shine Brightly

Joy Global's (NYSE: JOY  ) mining equipment sales were weak in just about every market it served during fiscal 2013, with the exception of copper miners. With solid demand and low supplies, it looks like miners Freeport McMoRan Copper & Gold (NYSE: FCX  ) and Southern Copper (NYSE: SCCO  ) are well positioned as they enter 2014.

A year to forget
Joy Global would probably like to forget fiscal 2013 which ended in October. Weakness across almost all of its end markets sent the bottom line tumbling a massive 30%. And weak orders suggest that 2014 isn't likely to be much better. One of the few bright spots has been copper mining, particularly in South America.

In its fiscal 2013 earnings release, the equipment maker noted that "global copper markets experienced a 3.6 percent increase in consumption during 2013" and that "inventory levels have decreased 30 percent since the beginning of the year." Joy went so far as to call copper "the most attractive investment in mined commodities."

During the conference call, Joy's executive vice president Edward Doheny highlighted particular strength in Peru. Shovels and loaders are, apparently, the hot products. Although increased capital spending could lead to an oversupply situation over the longer term, the stars seem to be aligned for copper to "shine" as we turn the page on a new year.

Focused on copper

Large diversified miners like Rio Tinto (NYSE: RIO  ) and BHP Billiton (NYSE: BHP  ) offer investors exposure to copper, but not a lot. The metal only makes up about 10% of Rio's business and a more meaningful 18% of BHP's. While that's nothing to sneeze at, it falls well shy of Southern Copper, where the namesake metal accounts for over 75% of sales.

Freeport McMoRan, meanwhile, is in a bit of a transition. In 2012, copper made up nearly 80% of its business, which was devoted entirely to mining. After two large oil and natural gas purchases in the middle of 2013, however, mining now makes up just 75% of the top line. So copper should be around 60% of Freeport's business going forward. A big drop, but the metal is still the driving force behind the company's results.

Moving around
Freeport's shares have advanced from the high 20's to the mid 30's since the oil and gas acquisition was consummated. Southern shares, meanwhile, have continued to languish near their 2013 lows. Of the pair, Southern Copper is probably the better option if you are looking for both focused copper exposure and the potential for upside in the share price.

Freeport clearly offers more diversification after the merger, which was obviously a hit with investors. But it still doesn't offer the diversity of a BHP or Rio, which are in industries as diverse as oil (BHP), coal, uranium (Rio), diamonds (Rio), and iron ore. It's that broad diversification that's allowed BHP to remain profitable despite the downturns in so many of its businesses.

That said, mega miners Rio and BHP, which rank among the largest copper miners despite the metal's relatively small contributions to their results, both count on iron ore for about half of their businesses. Similar to Freeport's reliance on copper, but iron ore is currently out of favor. So it isn't clear that Rio or BHP would be a better option than Freeport if you are looking for diversification.

The nicest house on a bad block
Copper is the nicest house on the mining block. That could present a buying opportunity if you want to own a natural resource that isn't in the midst of a supply/demand imbalance that's keeping prices weak. Southern Copper will provide you the most direct exposure. However, Freeport's oil and gas push provides diversification into a non-mining area that is doing relatively well. And it differentiates the company from BHP and Rio, where out-of-favor iron ore is a big piece of the pie.

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9/23/2016 4:02 PM
BHP $32.54 Up +0.08 +0.25%
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