Copper has been trending above $4.00 per pound since February riding on optimism regarding a robust US economic growth, strong demand from China and mounting concerns of a supply crunch. On Apr 14, copper futures for May delivery gained 2.4% to $4.1285 per pound — a level last seen in August 2011. Notably, copper had hit an all-time high of $4.63 per pound in February 2011. The metal has had a good run so far this year, notching a gain of around 18% owing to accelerating demand on account of pick up in manufacturing activity, particularly in China.
The Caixin China General Manufacturing PMI has remained above 50 since May last year, while the IHS Markit Eurozone Manufacturing PMI has also trended above 50 since July last year. A reading above 50 indicates expansion in manufacturing activities. The US manufacturing sector has been expanding since the past 10 months after being battered by the COVID-19 induced lockdown. Moreover, the fresh round of coronavirus relief package is anticipated to provide a boost to the economy, and in turn, the manufacturing sector.
President Biden’s plan to spend on $2 trillion to overhaul and upgrade the nation’s infrastructure and promote green policies will require huge amount of copper. The plan has $174 billion allotted for boosting the electrical vehicle (EV) market. This includes among others, providing incentives to Americans to buy electric vehicles, funding to build 500,000 by 2030, and converting transit and school buses from diesel to electric. Notably, electric vehicles use four times as much copper as petrol-based cars.
On the supply front, major producers Chile and Peru, which together account for about 40% of world copper production, have been volatile due to the impact of the coronavirus pandemic. While Chile’s copper output decreased 1% in 2020, production in Peru fell 12.5%. Chile closed its borders in April in an effort to counter the rise in coronavirus cases as it seeks to accelerate its vaccination campaign. Notably, the country’s reported infections have crossed the 1 million mark. The stepped-up border restrictions may disrupt mining activities by delaying equipment replacement. The unrelenting nature of the pandemic remains a persistent threat to copper miners. However, this demand-supply imbalance will prop up copper prices, which bodes well for miners.
The long-term outlook for copper remains positive as demand is anticipated to improve on investments in electric vehicles and renewable energy, and infrastructure. Meanwhile, grade decline, rising input costs, water constraints and scarcity of high-quality future development opportunities continue to constrain the industry’s supply. Notably, miners are now committed to cost-reduction strategies and digital innovation to drive operating efficiencies, which will aid margins in the long haul.
Copper miners fall under the Zacks Mining – Non Ferrous industry, which has gained 220.5% in a year compared with the S&P 500’s rally of 50.1%. The industry falls under the broader Basic Materials sector, which surged 75.4%. The industry currently carries a Zacks Industry Rank #97, which places it at the top 38% of 256 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
Per the latest Earnings Trends, after remaining in the red for the past four quarters, the Basic Materials sector returned to growth with an earnings improvement of 28.1% in fourth-quarter 2020. The sector is expected to witness growth of 65.8% in earnings in first-quarter 2020, followed by 162.7%, 49.4% and 12.3% in the second, third and fourth quarters, respectively. The prospects for 2021 look promising for the sector with an impressive earnings growth projection of 58.8%.
We suggest investors to keep an eye on these four copper-mining stocks that have been handpicked by us. Notably, each of these stocks have a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold), and outperformed the S&P 500’s rally of 50.8% in the past year. This is shown in the chart below. These stocks are anticipated to carry the momentum forward backed by their earnings growth projections.
BHP Group BHP : Headquartered in Melbourne, Australia, BHP Group engages in exploration, development, and production of oil and gas properties; and mining of copper, silver, zinc, molybdenum, uranium, gold, iron ore, and metallurgical and energy coal.
In 2020, BHP produced around 1.7 million tons of copper in 2020. The company is expanding its mine at Spence in Chile, extending its life for another 50 years. It has also boosted exploration spending for more copper from all over the world. The company has four major projects under development in petroleum, copper, iron ore and potash with a combined budget of $8.5 billion over the life of the projects, which will drive growth in the long run. Efforts to make operations more efficient through smart technology adoption across the entire value chain will continue to aid in reducing costs, thereby bolstering the company’s margins. Its focus on lowering debt will also contribute to growth.
The company has a long-term estimated earnings growth rate of 4%. The Zacks Consensus Estimate for the company’s fiscal 2021 earnings suggests year-over-year growth of 77%. The estimate has been revised upward by 12% over the past 90 days. The stock flaunts a Zacks Rank #1. Its shares have appreciated 88.3% in the past year.
Rio Tinto plc RIO: Headquartered in London, the U.K., Rio Tinto engages in mining of aluminum, silver, molybdenum, copper, diamonds, gold, borates, titanium dioxide, salt, iron ore, and uranium.
The company’s world-class portfolio of high-quality assets and strong balance sheet positions it well to navigate through these turbulent times. Rio Tinto’s disciplined capital allocation supports its ability to sustain production and increase investment in development projects (in high-return iron ore and copper), while delivering superior returns to shareholders. Notably, its copper projects at Resolution (Arizona) and Winu (Western Australia) offer significant growth prospects.
The Zacks Consensus Estimate for fiscal 2021 earnings indicates year-over-year improvement of 76%. The estimate has been revised upward by 26% over the past 90 days. In a year’s time, the company’s shares have gained 75.8%. The company sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Southern Copper Corporation SCCO: This company based in Phoenix, AZ engages in mining, exploring, smelting, and refining copper and other minerals.
The company has the largest copper reserves in the industry and operates high-quality, world-class assets. Its constant focus on increasing low-cost production is commendable. It has growth projects on track that will help achieve its target of producing 1.9 million tons of copper production by 2028.
The Zacks Consensus Estimate for the company’s earnings in 2021 suggests year-over-year growth of 66%. The estimate has moved north by 20% in 90 days’ time. It has a long-term estimated earnings growth rate of 17.8%. The company’s shares have soared 158.9% in the past six months. It currently flaunts a Zacks Rank #1.
Freeport-McMoRan Inc. FCX: This Phoenix, AZ-based company is engaged in mineral exploration and development; mining and milling of copper, gold, molybdenum and silver; and smelting and refining of copper concentrates.
Freeport is conducting exploration activities near existing mines with focus on opportunities to expand reserves. The company will benefit from ongoing large-scale concentrator expansion project at Cerro Verde that will provide incremental annual production of around 600 million pounds of copper and 15 million pounds of molybdenum. It recently completed the Lone Star copper leach project and is on track to produce around 200 million pounds of copper annually. Efforts to cut costs and debt levels appear encouraging.
The Zacks Consensus Estimate for earnings for fiscal 2021 indicates year-over-year improvement of 391%. The estimate has been revised upward by 22% over the past 90 days. Shares of the company has soared 379% over the past year. It has a Zacks Rank #3 and a long-term estimated earnings growth rate of 26.5%.
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