Re-upping my 'Case for the Copper Bull'
My Commonstock Portfolio
Still working on getting it linked up to the site, but opened a new account and bought the dip on Thursday. Dip kept dipping on Friday, but I added these names because I believe in them:
$AFM.V (tin, DRC)
$AN.V (lithium brine, Argentina)
$ATX.V (copper, Chile)
$BRW.V (lithium spodumene, Eastern Canada)
$EOG.V (oil & gas explorer, Guyana/Namibia/South Africa)
$FOXG.V (gold, Quebec)
$FPX.V (nickel, British Columbia)
$HZM.TO (nickel, Brazil)
$IVN.TO (exposure to multiple metals incl copper/nickel/zinc, DRC)
$MEG.TO (oil & gas, Alberta)
$NGEX.V (copper/gold/silver, Chile)
$ROK.V (oil & gas, Alberta & Saskatchewan)
$STEP.TO (oil field services, North America)
As always, please DYODD and know that I prefer higher risk/reward opportunities and may trade them quickly, so please ask questions, including if I sold!
The Case for the Copper Bull: Why Wise Investors Are Adding Now
My current copper holdings include:
$FIL.TO, $NGEX.V, $SURG.V, $IVN.TO, $TECK-B.TO, $ATX.V, and $VCU.V
Commonstock & Twitter provide a wealth of information & varied perspectives, resulting in discussions that have contributed to my growth as an individual, as well as an investor. Over the past year, I have engaged in several conversations related to the commodity sector. One of the most undecided arguments appears to be that of the copper bull vs bear. Approximately a year ago, a Twitter friend (thanks Nate!) was kind enough to share a compelling research report by the natural resource investment firm Goehring & Rozencwajg, entitled “The Problems With Copper Supply”. After reading it, I became firmly entrenched in my stance as a medium-to-long term copper bull, and since then my conviction has only grown.
Short-term bears are likely correct in their views, given the current fundamentals relating to copper prices; however, in my opinion this creates significant near-term buying opportunities. As this April 25 Reuters article (https://www.reuters.com/markets/europe/bears-tip-toe-back-into-copper-market-demand-fears-grow-2022-04-25/) states, “supply concerns haven't gone away. Far from it…The hits to mine supply undoubtedly spell future trouble for copper, but right here and now it's the outlook for demand that is concentrating minds.” By the year 2025, supply is expected to fall off a cliff, and demand has a multitude of reasons to explode higher.
Depletion, Discoveries, Demand
Goehring & Rozencwajg’s research determined that by the late 1990s ‘the introduction of new large-scale copper mines slowed dramatically while depletion in the existing, aging mine base slowly began to accelerate.’ G&R modelled 115 mines representing 80% of global mine supply outside of China and found that after years of steadily rising, copper head grades had started to quietly decline. Their research strongly suggests that supply growth, minimal since 2016, will continue to disappoint. “Between 2000 and 2020, high copper prices allowed companies to grow their reserve basis even in the face of limited new copper discoveries. Because of increasing depletion issues, the lack of new world class mines coming online, and geological constraints embedded in copper porphyry deposits, our research tells us that copper supply will show little growth this decade. Strong demand is about to collide with severe copper supply problems. “
G&R expects copper prices to potentially peak near $15 per pound by the latter part of this decade.
Recommended Reading: “The Problems With Copper Supply”. The report is available for free download on their website (info.gorozen.com).
Goldman Sachs Calls Copper the New Oil
In early April of this year, Goldman Sachs claimed copper is “sleepwalking towards a stockout”. Goldman flagged a “scarcity episode” by the end of the year as global stocks shrunk to just over 200,000 tonnes – scarcely enough to cover three days of global consumption, pointing to “an extreme fundamental turn” for the metal. For the first time in a decade, exchange stocks declined “instead of rising during what is this metal’s main seasonal surplus phase.” Upping its three, six, and 12 month price targets, GS now expects a new record high within three months.
Mining.com reported that Erik Heimlich, head of base metals supply at CRU, stated global industry needs to invest more than $100B to build mines to reduce a potential 4.7M-ton annual supply deficit by 2030. The world would need to build eight projects the size of BHP's Escondida in Chile, the world's largest copper mine, over the next eight years. Heimlich questioned the ability to do so, given the historically low completion rates of such large-scale projects. "A large share of the greenfield possible projects in 2012 remain under-developed, so there are questions about the ability to respond to the supply gap in an efficient and timely manner," Heimlich told the 2022 CRU World Copper Conference held in Santiago, Chile.
Copper miner Teck Resources said in a recent investor presentation that copper demand from the electrification of everything is going to grow by 26 percent annually through the rest of the decade, which for revenue growth in the tech sector doesn't sound huge, but in commodities, 26 percent annual demand is massive.
In a YouTube video posted in May, 2021, GS’s Nick Snowdon discusses a surge in green capex, combined with the lack of copper mining projects, and how it will lead to a multi-year bull market in copper.
Recommended video: https://www.youtube.com/watch?v=y7TwDsm2tUE&t=286s
Dr. Copper’s Diagnosis: Inflation
In March of 2021, Global X offered some insight into what was driving the copper rally at the time. If anything, the case presented by author Rohan Reddy has only strengthened. Reddy notes that copper prices are positively correlated to inflation, and its historically one of the best performing assets during inflationary periods. When investors believed rates were going to increase, copper prices historically led the way. In fact, according to The Visual Capitalist (“Why Investors Go to Copper As An Inflation Hedge,” 3/06/2018.) the price of copper has risen 18% for every 1% annual rise in consumer prices since 1992.
Recommended Reading: https://www.globalxetfs.com/whats-driving-coppers-rally/
A frequent discussion point used in the bear argument is that of China’s slowing growth. Though it’s impossible to deny this could have a significant impact on copper demand, there are many reasons to believe that it won’t. In late April, China’s President Xi Jinping committed to boosting infrastructure construction in Beijing’s latest bid to rescue economic growth. Xi stated that “All-out efforts must be made to spur infrastructure spending,” as “infrastructure was a pillar of economic and social development.” Even if China’s growth recedes, one factor often ignored in the debate is the incredible growth of ASEAN nations.
Chile’s state-owned copper producer Codelco aims to quadruple sales in Southeast Asia by 2023. They intend to make a more aggressive push into the Indian market, betting on these markets’ higher consumption growth potential in comparison with China. Southeast Asia and India are expected to have the highest growth in copper consumption over the next 20 years, Carlos Alvarado, a vice-president for Codelco, was reported as saying.
In a 2020 report published by the Minerals Council of Australia, their research stated that ASEAN nations are equivalent to Australia’s second largest trading partner when calculating total two-way trade. ASEAN nations had a combined GDP of US$2.8 trillion – larger than India – and its collective economy has grown by almost 50 per cent over the past decade. ASEAN is forecast to overtake the EU and Japan to become the 4th largest economy in the world by 2050, behind China, India, and the United States.
- ASEAN imports of minerals and basic metals are growing rapidly. Over the last five years, its top 10 mining and basic metal manufactures imports have almost doubled
- Import growth has been faster in aggregate than for China, India, and Japan, and was faster than for the rest of the world minus ASEAN.
- Demand for metals like steel increases dramatically as economies reach per capita incomes of US$5000-10,000; some ASEAN countries are just above this while others are not too far below it
- Demand for metals like copper and nickel may not peak until per capita incomes are well in excess of US$20,000 per year.
A crucial metal required for electrification and the energy transition, copper demand is estimated to double by 2030. A lack of investment in exploration and the development of new mines, as well as declining grades at existing ones, all but guarantee copper is heading for a supply crisis. A long-term bull market is underway, and many investors don’t understand the complex issues affecting supply. As G&R stated in their excellent research report, “Strong demand is about to collide with severe copper supply problems. Copper prices are heading much, much higher.” With copper prices off their 52wH of $5.01/lb and forecast to go much higher in the medium-to-long term, investors are presented with an excellent buying opportunity.
It’s important I reiterate that the junior mining sector is highly volatile and involves greater risk than more established mining companies. For this reason, I monitor my holdings very closely and am prepared to sell on any changes in sentiment or anticipated drill results. In the months ahead, I will detail what strategies have served me well, and what has not. Every day is a learning experience, and I’m always grateful to those that share their knowledge with me. Your success as an investor will greatly improve when you are open to the benefits of learning from others around you. If you're new to the commodity space and have questions about terminology or the mining sector, please ask me questions in the comments! If I don't know the answer to something, I will do my best to find it.
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Great post, hadn't considered investing in commodities other than "precious metals", maybe it's time to explore options.
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