A Copper Rally Will Create Value for These 2 Companies

If you believe the signs for a copper rally are present then these two companies have solid value.

Jul 5, 2014 at 7:45AM

With copper prices showing signs of rebounding it is worth looking at some of the large copper producers to see if any might be poised to take advantage.

Bullish on copper   
Copper prices hit a four month high this week. Optimism about the Chinese and U.S. economies are playing in a role. Chinese manufacturing grew last month for the first time this year.

After news broke out regarding an investigation into a trading company receiving numerous loans using the same stock of copper its price plummeted. But as the news has died down copper futures have almost fully recovered from their lows in early June.

Stockpiles of copper are at their lowest level since October, 2008. Demand will outstrip this year according to several analysts.

Copper should catch-up to other industrial metals     
Other industrial metals that are closely tied to manufacturing have grown this year. Zinc is up 6% for the year while aluminum is up 4%. Lead is up 5% for the year and nickel has produced the most gains, up 13 %. Copper is still down 6% which suggests it has some room to grow.

Even iron ore, which has been hammered by lower Chinese demand and high inventory stockpiles is forecast to grow. Citigroup is predicting a rise of more than 10% in price this year.

All of this is great news for mining companies. More particularly the news is good for companies with huge copper exposure in their mining portfolios.

Low copper prices are just on the problems     
Freeport-McMoran (NYSE:FCX) has been hit with a double whammy when it comes to copper production. The decline in the price in the metal coupled with the trouble in Indonesia over the heavy export tax on unrefined metal has put a drag on the company's price.

For the first quarter of 2014 the company saw its net production of copper decrease by 3.5% fueled entirely by the 3.6% drop in production from its mines in Indonesia. A rise in copper prices would help mitigate the Indonesian situation.

Copper sales represented 57% of total revenue for the company last quarter. If copper can simply return to its start-of-the-year price it would result in over 3% revenue growth, or roughly $150 million a quarter.

Healthy margins are not enough to overcome copper's slide                                  
The first quarter of 2014 was not a particularly good one for Southern Copper (NYSE:SCCO). The company saw net income decline almost 35% while earnings dipped just under 23%.

Southern Copper was hurt by rising production coupled with lower sales prices. Compared to the first quarter of 2013 the company realized roughly 11% less on copper sales per pound, 12% less on molybdenum, 32% dip on silver prices and almost 21% less on the sale of gold.

On the positive side, the company continues to enjoy healthy margins. Southern Copper's consolidated costs averaged over the past 4 years comes in at almost half that of Freeport McMoran. 

Roughly three quarters of Southern Copper's sales come from copper. With some analysts predicting prices dipping below $3 per pound earlier this year a mere stabilization in copper prices at the current level around $3.18 would present real value in Southern's price. Returning to levels seen near the beginning of last year would be tremendous.

Copper's strength will produce value                                                                                  
If, as some analysts are predicting, copper demand outstrips production as the year goes on then it is possible that copper prices will grow along similar lines as other industrial metals. Such growth would provide some real value in both Freeport McMoran and Southern Copper. Given the supply situation and the uptick in Chinese manufacturing, I am bullish on copper, which would have been very odd to say as recently as last month.

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Beryl DePalma 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.

A Financial Plan on an Index Card

Keeping it simple.

Aug 7, 2015 at 11:26AM

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