Are You Ready for a Copper Rally?
Piyush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Copper is an industrial metal, mainly driven by infrastructure projects and industrial production. Also China accounts for 40% of the global copper demand, which makes it important to track Chinese economic triggers to ascertain the commodity’s future.
According to recent reports, China’s industrial production rose by a massive 10.1% in November, rising for the 4th straight month, on a YoY basis. Additionally according to Financial Times, “Indian purchasing managers’ index rising to 54.7 from 53.7 in November (a figure above 50 shows growth), according to HSBC and Markit Economics. In services, the PMI in December rose at its fastest pace in three months." Analysts at Barclays estimate that in the first half of 2013, copper demand would outpace its supply by 316,000 metric tonnes, and that China’s copper demand in 2013 would increase by 5.5%. This presents a bullish case for copper mining companies, and here a few picks that can make it to your portfolio.
Southern Copper (NYSE: SCCO) has a market cap in excess of $31.5 billion, and is one of the largest integrated copper miners in the world. Though it also produces gold and silver, most of its revenues are generated by mining copper. The company has been posting stellar financials results, with its copper production rising by 7% in the first half of 2012. In the third quarter its production rose by 3%, and in 2013, the management expects to ramp up its copper production by 4.6%.
Additionally, its development of Quebalix project recently began operations, and its expansion of Beunavista mines were 32.4% completed in October. Its Toquepala project and Cuajone project are also undergoing expansions, which are expected to begin production by 2014. This would allow the company to take advantage of the rising global copper demand. In Q3, the company also received the deliveries of 5 drills and 27 out of 41 trucks, which would help in increasing its productivity.
The management recently announced that it has $1 billion earmarked for expansions in 2012, and estimates its capital expenditures to be $1.9 billion for 2013, $2.1 billion for 2014, and $1.3 billion for 2015. Most of these expenditures would be used for expansions and acquisitions and it’s not hard to conclude that production increases with copper prices on the rise, makes Southern Copper hard to miss.
However not all copper miners are doing well. Shares of Freeport-McMoRan Copper (NYSE: FCX) have declined by 16% YTD and I believe the slide will continue. Freeport is a pure play copper mining company, but its decision to venture into the energy sector, without any expertise, was not well received by the street. Additionally its recent spree of acquisitions, have driven its up net debt to $16 billion. On top of that, analysts believe that the acquisitions have low ROI’s and have been carried out at a premium. In short, Freeport should be missed.
Though the shares of Indian based Sterlite Industries (NYSE: SSLT) have risen by nearly 19%, Sterlite should be missed due to its disappointing Q2 results. Despite an impressive 68.1% growth in net sales, its net profits fell by 1%. It's gross margin of 22% is significantly lower than most of its peers, and about 62% lower than Southern Copper. The company needs to nurse its margins back to health, and until then investors should stay distant from this one.
The Foolish Wrap Up
At the current price, shares of Southern Copper yield a massive 9.95% with a high payout of 87.65%.With a Q3 net income of $534 million, current ratio of 4.79x and $1.537 billion in cash reserves (as of September, 2012), its dividend payouts appears to be sustainable.However due to the mentioned reasons, Sterlite Industries and Freeport-McMoRan should be avoided. To cut short, only Southern Copper gets a Foolish Buy rating.
PiyushArora has no positions in the stocks mentioned above. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!