Copper Isn't Crashing, but Be Careful

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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. 

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Joshua Bondy

Joshua Bondy works in the energy and materials sector. He works hard to bring to light the underlying forces that drive prices and move the market.

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8/28/2015 4:00 PM
FCX $10.50 Up +0.31 +3.04%
Freeport-McMoRan C… CAPS Rating: ***
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Rio Tinto plc (ADR… CAPS Rating: ***
SCCO $27.35 Up +0.42 +1.56%
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TCK $7.08 Up +0.22 +3.21%
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