Why Copper Miners Might Offer Long-Term Value
Steel, Copper, or Aluminum: What's the Best for Your Portfolio?
Copper miners
Though there are significant near-term headwinds for the three metals that we looked at, copper is one metal that could offer long-term upside. Steel looks like the most vulnerable in the short to medium term and a major price recovery looks unlikely. As for aluminum, the hanging worry of Chinese exports will keep the prices in check despite favorable demand. However, the excess aluminum capacity in China could eventually balance itself as aluminum demand is still growing in the country.
And here lies the biggest challenge for the global steel industry: Chinese demand has likely peaked, leaving the industry with massive overcapacity. This overcapacity can be tackled only through permanent capacity closures. Unlike aluminum, steel does not have the privilege of rising demand to absorb the current excess capacity. Capacity adjustment in the steel industry will be a long and painful process.
Investors who want to bet against the recent rally in steel shares can also consider going short on the SPDR S&P Metal and Mining ETF (XME). U.S. Steel (X) forms 4.6% of XME’s portfolio.
Southern Copper
Now, within the copper space, miners with low unit cash costs are better placed to survive the current downtrend. According to Southern Copper (SCCO), it was the lowest cash cost producer last year. Companies with low financial leverage will be able to hold on to their assets for the future when commodity prices bounce back. Both Freeport-McMoRan (FCX) and Glencore (GLNCY) are looking at selling some of their assets and have also raised cash by selling fresh equity.
Though these are short-term positive measures, they will impact the earnings when the commodity cycle turns around. Though Southern Copper’s leverage ratios have risen over the last few quarters, they are still quite comfortable. However, Southern Copper is trading at a substantial premium to its peers as can be seen in the graph above. Having said that, SCCO has traded at a premium to other miners especially during the financial crisis of 2008.
In our next series, we’ll explore the valuation multiples of different mining companies. This will help you understand which stocks have run ahead of their fundamentals.
In the meantime, you can read, Copper Producers’ 2016 Plans: A Ray of Hope or a Cloud of Gloom? to explore more about what could drive copper miners this year.
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