Copper Mountain is a good bet on burgeoning copper demand
Large reserves in safe jurisdictions with a lot of tailwinds
There are many reliable forecasts of global copper supply and demand all of which are frustrated by the lack of any certainty of the timing of permitting, sovereign risks of changing royalty and tax regimes and even nationalization, and, the risks of mining generally. But it is increasingly clear that the future holds tight copper markets and that investments in copper miners in safe jurisdictions should perform well with several tailwinds.
While forecasts of copper supply and demand are fraught with risks the macro economic data still provide a useful overview. What seems clear is that currently producing mine production will fall shortly over the next few years, based on an overview from Codelco published by Scotia iTrade.
The underlying demand for copper is enhanced by the projected demand for electric vehicles (EV’s) which on average consume 185 pounds of copper versus about half that or less for typical ICE vehicle. Worldwide vehicle production averages about 70 million units per year, so a 20% share for EV’s would bump up copper demand by about 1.3 billion pounds, and if the EV revolution takes hold and all future vehicles become EV’s automotive demand for copper would reach somewhere around 13 billion pounds per year. Current world copper supply is on the order 44 million pounds and as the Codelco chart illustrates, maintaining even that level is going to require new sources.
In addition to EV’s, the necessary upgrades to world electrical grids to support a much larger EV population will see its own demand for more copper. There is little doubt that copper markets could be tight for a few decades, and for investors the question is which stocks offer the most opportunity. Majors like Freeport-McMoRan and Southern Copper are obvious choices among large capitalization companies but owing to their size will may not produce as high of returns as faster growing smaller producers, and investors are wise to choose companies operating in safer jurisdictions where the risks of expropriation or confiscatory changes to tax regimes are lower.
Canada is a relatively safe regime and Canadian producers are good candidates. Of them, I prefer Copper Mountain owing to its high leverage to rising copper prices both in terms of operating earnings (EBITDA) and net asset value (NAV). Copper Mountain is a pure play on copper with excellent assets in Canada and Australia, both reasonably safe mining jurisdictions.
I hold 10,000 shares of Copper Mountain and will likely add shares as the evidence of projected demand surfaces. I anticipate a return of somewhere around 25% per year compounded for the next few years. There are dozens of brokerage firm analysts who follow the company and I see no value in repeating their analyses here or substituting my own. In the simplest terms, there is a lot of support for the outlook for Copper Mountain among those analysts and whether the stock will rise in price depends more on the macroeconomic factors I have discussed than on the nuances of its particular operations.
Mines have two characteristics worth mentioning - one, they are going out of business at any particular mine as soon as they start production and two, the commodity price swamps all other factors in terms of their effect on profits once that mine is running. Management can’t control the amount of ore in the deposit or the price it will fetch in the market, and none of us can forecast either factor with precision. The company is profitable at today’s copper price, has relatively low debt, and enjoys growth projects in safe areas. I am willing to bet on this stock.