Please ensure Javascript is enabled for purposes of website accessibility

2 Top Copper Stocks to Consider Buying in 2017

By Reuben Gregg Brewer – May 19, 2017 at 1:27PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Southern Copper and Freeport-McMoRan are the purest plays in copper, but you'd buy them for different reasons.

Like most commodities, copper has been on a roller coaster over the last few years. That hasn't changed this year, with copper prices rising early in the year and then slowly coming back down. That's exactly what's happened to Southern Copper's (SCCO 2.95%) stock price, too. As one of the largest copper miners, though, it should be on your short list for a number of fundamental reasons. Freeport-McMoRan (FCX 3.65%) shares, on the other hand, have followed a different, news-driven path and is a worthwhile copper industry play in 2017 for a completely different reason.

Getting stronger

Southern Copper is the largest copper miner in the world by reserves, but it is only the fifth largest by production. Copper, meanwhile, made up roughly 80% of the miner's revenues in 2016. Many of the other large copper miners are far more diversified, with copper representing a much smaller slice of the pie. So, if you're looking for direct copper exposure, Southern needs to be on your list.  

A Southern Copper employee.

Image source: Southern Copper.

But there's more to like here than just that. For example, between 2013 and 2016, Southern Copper trimmed its operating cash costs per pound of copper by nearly 25%. It is the lowest-cost producer in the industry, beating out diversified mining giants like BHP Billiton and Rio Tinto, among others. It also has the longest mine life among its peers. Effectively, it can keep mining for copper longer than its peers without having to find new material to dig up.  

But Southern isn't sitting still; it has been investing in expanding production. Although 2017 production is expected to be flat with 2016, heavy investments this year are projected to increase production by 20% between now and 2020.  

Copper prices will wax and wane with supply and demand, but Southern will likely remain one of the best-positioned and most focused copper miners. If you're looking at copper, Southern needs to be on top of your wish list this year and in the future.  

Southern Copper compared to peers for copper reserves.

Southern and Freeport are among the largest copper miners in the world. Image source: Southern Copper.

The fixer-upper

At the other end of the spectrum is Freeport-McMoRan. This company is one of the world's biggest copper producers (it expects to be No. 2 in 2017), and its reserves are among the largest as well (No. 3). It's been lowering its copper costs, too. That's all good stuff, but it isn't what's driving the stock, which is down around 10% so far this year compared to Southern Copper's roughly 8% advance.  

The problem is news, though it hasn't been all bad. For example, Freeport made a poorly timed move into oil a few years ago that left it with a heavy debt load and an underperforming oil business. It's been working hard to get out from under that decision and finally made some good headway in 2016. Net debt, for example, fell roughly 40% last year. And it's been able to sell off most of its oil business. This is basically all good news, and it leaves copper as its core commodity focus, though it also produces gold and molybdenum.  

Freeport and Indonesia win if the Grasberg is resolved.

Freeport and Indonesia benefit from Grasberg working at full steam. Image source: Freeport-McMoRan Inc.

The problem this year, though, is that Freeport is dealing with a rule change in Indonesia that has led to reduced production, higher costs, and the scaling back of investment in the giant Grasberg Mine. That single mine accounts for roughly 30% of the miner's copper reserves and almost all of its gold reserves. It's a complicated legal and political issue that's going to be tough to work through, so it's reasonable that investors would be worried.  

That said, neither Indonesia nor Freeport benefit if the Grasberg mine stops operating. So a glass-half-full analysis suggests something will be worked out. And when that something does come to pass, aggressive investors who stepped in during the news-driven dip will stand to benefit. In other words, it could be a good time for those willing to take on a little uncertainty to buy one of the world's largest copper miners.

Two ways to play

Copper prices are going to change with supply and demand, there's nothing you can do about that. However, Southern Copper is a first stop for investors looking for a well-positioned and largely pure-play copper miner. Its fundamentals are strong, and it's set to expand production in the years ahead.

If you're a little more adventurous, though, Freeport-McMoRan's news-driven decline this year might have created a good opportunity to buy a world-class copper miner on the cheap. However, it's something of a special situation since you have to believe that the Indonesian issue will be worked out in a positive way -- the dynamics of the problem do suggest that's a highly likely outcome.

Reuben Brewer has no position in any stocks mentioned. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Southern Copper Stock Quote
Southern Copper
SCCO
$59.33 (2.95%) $1.70
Freeport-McMoRan Inc Stock Quote
Freeport-McMoRan Inc
FCX
$37.51 (3.65%) $1.32

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
351%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/29/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.