Copper May Be on Cusp of Investment Wave

With risks come opportunities, and there are plenty of both for junior copper miners right now. While it may be all too easy to be a red metal bear at present given the continued uncertainties in Europe and a slowdown in Chinese growth, some smaller-sized mining groups are upbeat about the road ahead.

“There are great opportunities for value investors,” said Rick Mark, CEO of Vancouver-based VMS Ventures (TSXV:VMS). Precisely because of market anxiety across the board from stocks to commodities, mining groups have an “obligation to reach out to shareholders…and tell the story” about the potential of exploring new mines.

There is certainly no shortage of investors seeking more information about the mining industry. This week’s Hard Assets Investment Conference in New York attracted over 300 analysts, brokers, financial advisors, and corporate executives. Granted, that audience may first and foremost have been interested in learning about the mining sector’s outlook amid pressing global risks. Yet, this may be the ideal time for those looking for solid returns to put their money into junior copper miners.

The biggest hurdle may be overcoming investors’ psyches amid persisting global worries. In the case of copper, bearish sentiment still prevails; Standard Bank’s statement that it remains “pessimistic” about copper’s price prospects is an all-too-common position in the market.

Nevertheless, while commodity prices may have fallen from their peaks in recent months, prices for most base metals, including copper, are actually “in good shape” at present compared to four years ago, argued Mark. He added that fundamental demand for the red metal will only grow stronger, especially as Chinese demand for copper in the power generation industry, rather than simply in construction, expands.

For its part, VMS is staying on track with developing its copper projects in Manitoba, Canada. The Reed copper deposit, a joint venture with Hudbay Minerals (NYSE:HBM) in which VMS has a 30 percent stake, is expected to begin production of 1,300 tonnes of copper by the end of 2013, subject to the receipt of required permits.

The challenge will be as much about how cost efficiently companies are able to mine for metals as it will be about how much metal they are able to produce. Indeed, Standard & Poor’s this week assigned a B rating to Hudbay’s long-term corporate credit rating and stable outlook due in part to the company’s low-cost mining operations and its own expectations for metal prices. It stated that the two factors “should support the fairly stable earnings and funds from operations generation.” While S&P noted that Hudbay is vulnerable because of its limited operating diversity, the agency nonetheless was upbeat about Hudbay’s operations in Manitoba due to its “fairly stable mining code” as well as “good relations with employees and communities” amid the risks miners large and small face in terms of labor unrest and environmental concerns.

While miners may have always been cost conscious, shareholder pressure is intensifying to make them more cost efficient, and as a result, potential returns on mega-projects, such as the Oyu Tolgoi copper-gold mine in Mongolia, led by Rio Tinto (ASX:RIO,LSE:RIO,NYSE:RIO) and Ivanhoe Mines (TSX:IVN,NYSE:IVN), are being closely scrutinized by investors. Copper giants Rio Tinto and BHP Billiton (ASX:BHP) both stated this month that they will be more conscious of balancing their large-scale ambitions with meeting the financial needs of shareholders moving forward.

The drive for miners to continue producing copper and to seek out new mines will remain strong. However, according to the Thomson Reuters GFMS Copper Survey for 2012, a limited global supply of copper concentrate will keep the market in a production deficit in 2012 .

What the market needs more than anything else is to be lifted out of uncertainties, particularly regarding Europe, said VMS’s Mark, adding that the best thing for investors would be to know what lies ahead for the continent, whatever the future of the euro.

“The world economy is being shaken” by the ongoing Eurozone turmoil, Mark said. “People are looking for the bottom…so they can look forward.”

Securities Disclosure: I, Shihoko Goto, hold no direct investment interest in any company mentioned in this article.