Copper Isn't Crashing, but Be Careful

Value investors are coming out of the woodwork as copper miners like Southern Copper, Teck Resources, and Rio Tinto have seen their stock prices fall, but 2014 is shaping up to be another challenging year.

Jan 6, 2014 at 1:37PM

Copper is one of the world's staple industrial metals. While scared investors sent gold into a free fall in 2013, copper performed better thanks to stable consumption. 2014 is shaping up to be a different story. The International Copper Study Group expects that refined copper production will exceed refined usage by 632,000 tonnes in 2014, an increase from 387,000 tonnes in 2013.

Companies to keep your eye on
Diversification is the age-old way to decrease risk, and Freeport-McMoRan Copper & Gold (NYSE:FCX) has played its cards well. It combined itself with McMoRan Exploration and Plains Exploration & Production to create a mining and oil and gas company. Now the oil and gas industry is expected to provide 27% of Freeport's 2014's earnings before interest, depreciation, and amortization.

Thanks to a strong global energy market, Freeport has partially shielded the company and its investors from the volatility in the mining industry. Freeport did assume $10 billion in debt when it completed its three-way merger, but as long as it keeps paying down the $21 billion in long-term debt on its balance sheet, it should be fine.

In 2013 the Energy Information Agency estimated that world energy demand will grow 56% by 2040. While the copper market has short-term difficulties, Freeport's diversification gives you a safe way to play the metal's turnaround.

Southern Copper (NYSE:SCCO) is a more focused copper play with more upside and downside potential. In the first three quarters of 2013, copper made up 78% of Southern Copper's revenue. 

Given Southern Copper's dependency on copper, it is not surprising that its total net income has fallen from $532 million in the fourth quarter of 2012 to $344 million in Q3 2013. When the copper-mining industry starts to shut down more unprofitable mines and abandon greenfield projects, this company will be a great way to play the rebound. For now its dependency on copper makes its income relatively risky. When industry forecasts point to little or no oversupply, Southern Copper will be a worth a second look.

Teck Resources (NYSE:TCK) is diversified like Freeport but with coal instead of oil and gas. In the nine months ending in Q3 2013, coal made up 45% of its revenue and gross profit. Recently the global coking-coal industry and Teck have benefited from falling Mongolian coal exports to China. 

Copper is still an important part of Teck Resources. The metal made up 38% of its gross profit in the first three quarters of 2013. As copper prices fell, its copper division is looking to reduce costs. It has slowed development of the Quebrada Blanca project in Northern Chile. 

Teck is a good diversified miner to look at, but Freeport offers more diversification thanks to its oil and gas operations.

Rio Tinto (NYSE:RIO) is a big company. It has a global portfolio of copper assets, including a 30% interest in the huge Escondida mine. Even though it produces a large amount of copper, Rio Tinto is still primarily an iron-ore producer. Based on numbers from the first half of 2013, a 10% move in copper would impact its earnings by $237 million, while a 10% move in iron ore would impact its earnings by approximately $1.6 billion. Copper only brought in $348 million in post-tax earnings in the first half of 2013 compared to about $4.3 billion in iron-ore post-tax earnings.

Due to Rio Tinto's large iron-ore operations, the company is a poor way to play the copper market, though depressed copper prices will have some impact on its earnings.

Final thoughts
2014 is shaping up to be a challenging year for the copper industry. Thanks to its significant oil and gas operations, Freeport-McMoRan should have a relativity easy time dealing with low copper prices, but the focused copper miner Southern Copper is a different story. If you are looking for a simple way to play a copper rebound, Southern Copper is a good pick, but is best to wait until 2015's supply and demand situation becomes clearer. 

Discover Our Top Stock Pick for the New Year
There’s a huge difference between a good stock, and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it’s one of those stocks that could make you rich. You can find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.


Joshua Bondy has no position in any stocks mentioned. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. Try any of our Foolish newsletter services free for 30 days. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information