At Capital 10X, we’ve been covering copper well before the pandemic supercharged demand. The red metal is often referred to as “Dr. Copper” due to its uncanny ability to serve as a gauge for the overall health of the economy. We think copper’s recent price performance is sending some very important signals about the state of supply and demand that deserves to be covered.

While the International Monetary Fund has been warning about slowing global growth, physical and copper stocks have been on a tear the last 6 months, rising 30% and 50% respectively.

Rising copper prices into slowing economic growth can only mean one thing. Tight supply.

Copper Beating the Stock Market Since July 2022

In today’s note we review just how tight the supply situation will be for the next few years at a minimum, and discuss two companies we’ve identified that will significantly benefit from higher copper prices.

The Inventory Situation

Global inventories for copper and other industrial metals held at exchange monitored warehouses (LME & SHFE) are at record low levels.

The numbers reported may not actually reflect the severity of the supply depletion, as market participants have lost some trust in the data coming out of the LME after the recent Chinese driven nickel squeeze.

There is increasing mainstream coverage of the issues surrounding copper supply vs demand, demonstrating just how long the supply deficit has been growing.

One such article we’d like to highlight comes from CNBC.

The article echoes our multi-year copper thesis and foresees a “secular change” in overall copper demand.

Alan Chu, Lead Portfolio Manager at BNY Mellon noted:

“When you look at the long-term secular story, you can just see strong demand. A lot of people focus on lithium as the kind of energy transition metal, but I think we should be much more focused on copper, because I think that is the real pinch point, the real choke point for the energy transition story.”

Peruvian Civil Unrest, Chilean Production Declines

On the supply side geopolitical risk has come to the forefront of investors’ minds, as South American jurisdictions have faced disruptions in production. In the presence of labor disputes, producers have also contended with governmental attempts to renegotiate contracts and tax plans, as they fight for a larger share of mining profits.

In Peru, there has been mass protests since Peru’s Vice President Dina Boluarte was sworn in, after leftist leader Pedro Castillo was arrested and ousted from office in an impeachment trial. Peru represents 10% of global copper production.

On January 20th, Glencore announced a upcoming suspension of operations at its Antapaccay copper mine, after protesters looted and set fire to the site. In Chile, there’s a year-on-year copper production decline of 7% since November. Chile is the world’s largest copper producer, representing a heaping 27% of global supplies.

Dollar Down, Copper Up

China reopening after COVID-19 lockdowns was a tailwind for copper prices, although somewhat offset by the Fed raising rates and tightening financial conditions, stoking fears of a recession.

The performance of a basket of battery metals have been propelled by anticipation of modest growth in the Asian nation, an increase in industrial activity, construction and demand for electric vehicles.

A decline in the dollar has helped to boost the fortunes of copper as well. The USD is down 10% from its September 2022 peak as the market began discounting a peak in US interest rates, bringing relief to foreign buyers and investors who purchase the red metal in U.S. currency.

Robin Wood, Vice President of Metals & Mining with Wood Mackenzie succinctly laid out the long-term bull case for copper in this short video:

Copper Producers – A Hedge Against Inflation, A Shield Against Volatility

The recent strength in copper prices in the face of growing recession fears, is the market’s way of telling us to purchase copper producers and explorers as long-term protection against the volatility of near-term prices.

Amerigo Resources

One of the names that screened the most attractive based on our proprietary screening methodology is a small cap copper miner with a unique business model, Amerigo Resources (TSE: ARG).

Amerigo is a company with strong leverage to copper prices and the highest dividend yield in the sector at 8.3%, while shielding investors from the largest risk they take on when investing in the copper sector: Mining risk.

Amerigo produces copper without a copper mine: They recover copper from the waste stream of one of Chile’s largest copper mines, El Teniente.

El Teniente has over a 70 year history of reliable mining operations, and Amerigo simply processes the waste to recover the copper along with other metals like molybdenum. The copper concentrate produced is largely the same concentrate produced by traditional mining operations.

Because Amerigo is not the operator of the mine, it has minimal sustaining capital needs and does not have the often significant environmental liabilities that come with operating a mine.

Amerigo Resources’ unique value comes from its peer leading dividend yield and conservative balance sheet. Amerigo’s 8.3% dividend yield puts it ahead of all but
one of the highest yielding companies in the S&P 500 and well above TSX Index and
the TSX Dividend Aristocrats Index.

Amerigo even yields more than the average high yield bond at 7.7%, even though the company is in a net cash position, putting its credit quality far above the typical high-yield company.

Amerigo has set the dividend at a conservative level, that can be sustained in all but the most distressed copper price environments in our view.

Lundin Mining

Looking at larger company copper exposure, we like Lundin Mining best (TSE: LUN).

Lundin trades at a ~10% discount to its C$10.71/sh NAV and has a 4.0% dividend yield on top.

The main reason Lundin screens attractive to us is the fact it trades for a big discount to larger peers like Freeport and First Quantum and at a 10% discount to the copper universe as a whole.

Lundin mining offers significant geographic diversification which is the benefit of owning a larger miner. Lundin also operates in stable jurisdictions and has demonstrated an ability to consistently grow production over time.

Given Lundin’s low production costs, rising revenue and conservative debt profile, we like the mix of yield, discounted valuation, upside to higher copper prices and a low risk balance sheet.

A Supercycle for Copper?

At Capital10X copper is one of our favorite commodities for the next 10 years. The electrification of the global economy through electric vehicles and renewable energy, is a massive multi-year tailwind for copper.

We are always on the hunt for companies with low debt vs cash, low production costs, high dividends and most importantly leverage to a rising copper price.

Amerigo Resources (TSE: ARG) and Lundin Mining (TSE: LUN) tick all those boxes today. But we are always searching for additional companies and investment vehicles that will benefit from the coming copper supercycle.

Stay tuned…

Amerigo Resources is a market awareness client of Capital 10X. For more information, including potential conflicts of interest please see our Content Disclaimer.