Copper – The Catch Up Inflation Trade

Inflation Hedges: Gold, Silver & Copper

Historically gold, silver and copper have traded together (see graph below); this relationship exists because all three metals are hedges against inflation.

In this context we can see that both copper and silver have lagged gold in the recent monetary stimulus driven gold bull market.

The massive increase in monetary expansion initiated by the Federal Reserve in the wake of the lockdowns imposed to address Covid-19 is the main reason to own hard assets like gold, silver and copper.

Money supply growth (M2) is rising at its most rapid rate since the monthly data series began in 1959.

Copper and copper miners have had a strong rally off the bottom, however they significantly lag gold and gold miners.  The VanEck Gold Miners ETF (NYSE:GDX) is up 52% year-to-date while copper focused mining companies are on average flat on a year-to-date basis.

We believe this presents a meaningful “catch-up” trade opportunity in these copper focused mining stocks.

Additionally copper continues challenged on the supply side; with a slower-than-expected return to full production in Peru and the possibility of labor disruptions in Chile adding to supply concerns.

Examining the Valuations of Copper Miners

On a forward price-to-sales basis (analyst consensus) Lundin Mining (TSX:LUN) and Freeport (NYSE:FCX) are the most expensive; while First Quantum (TSX:FM) and Sierra Metals (NYSE:SMTS; TSX:SMT) are trading at the most attractive valuations.

On a trailing 12 month price-to-cash flow basis Lundin Mining and Freeport are once again significantly more expensive than First Quantum and Sierra Metals.

It’s clear based on historical fundamentals there’s a catch-up trade in copper relative to gold, additionally there are very meaningful supply constraints.

Among the copper miners First quantum and Sierra Metals are the most attractive on a valuation basis.

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