Copper Miners are the Leveraged Play on Economic Stimulus

Investor’s don’t call copper “Doctor Copper” for nothing. 

The metal has historically been a leading indicator of economic growth. 

Copper is in everything, houses, buildings, electronics and has many industrial uses. 

A pick up in economic growth equals more demand for copper, hence the metals stellar economic indicator status.

Money Printing = Inflation = Own Commodities

In the last two financial crises, Central Banks turned to money printing and large scale asset purchases to stimulate the economy.

Source: US Federal Reserve

This stimulus was used to combat high levels of unemployment in the economy, which in turn also benefits the stock market. 

Historical market analysis has shown that when unemployment is above average (recessions), the returns of the S&P 500 are nearly 10% higher than when unemployment is below average (the end of bull markets).

We are currently in the more attractive return scenario.

S&P 500 Return Under Different Unemployment Trends

Source: A Wealth of Common Sense

How Does Copper Perform?

Looking at past history, when government’s are printing money and the threat of inflation (loss of purchasing power) is in the air, commodity prices and commodity stocks tend to do quite well. 

Copper Price ($/lb)

Source: Bloomberg

Look at 2009 for example. From the bottom in early 2009 to the peak in 2011, copper mining stocks returned 360%, absolutely crushing the return of the S&P 500 with an outperformance of 180%.

Source: Bloomberg

Turning to today’s market, we find that money printing is again good for copper. 

The Global Copper X Miners ETF is outperforming the broader market by 60% year to date. 

Source: Bloomberg

And most importantly, we don’t think the opportunity is over for Copper stocks. 

More Upside to Play For

We are still in the early innings of a global economic expansion in our view, driven by unprecedented levels of fiscal stimulus. 

Using the 2009 financial crisis as a guide, there is still significant upside to play for in the copper mining stocks, in both relative (vs the market) and absolute terms.

Capital10x believes Sierra Metals (NYSE:SMTS, TSX:SMT) and First Quantum (TSX:FM) are the best positioned for gains from a fundamental valuation perspective.  

Miners We Like

Sierra and First Quantum screen cheap on a price to sales basis against larger peers which is a great starting point. 

However, companies can have different margin profiles, so looking at them on a price to cash flow basis is the more powerful and useful metric. 

Again Sierra and First Quantum look to be value buys with estimated price to cashflow multiples at a 42% and 64% discount to Freeport and Lundin.

In commodity investing it pays to buy the discounted miners in a bull market. 

Source: Bloomberg

With another round of stimulus almost guaranteed in the coming months, the best is likely still to come for copper the metal, and the companies that mine it. 

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Sierra Metals is a market awareness client of Capital 10X.

The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.

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