Investing in Copper as Global Uncertainty Rises

Copper under pressure from macro worries

Increased global uncertainty brought on by issues like inflation, recession fears and the outbreak of the Russia-Ukraine war have hit copper, and the commodity has also seen demand retreat in major consumer country China.

China’s property market is a key driver for copper demand as copper is primarily used in construction. But worries over China's economic growth and its COVID-19 lockdown measures have cast doubts over what may be ahead for copper.

In the short term, Robert Edwards of CRU Group told the Investing News Network (INN) that he is still concerned about Chinese residential real estate. “But copper demand is benefiting from end uses related to the green energy transition, such as electric vehicles and renewables, along with exports of wire and cable and some copper semi-fabricated products,” he said.

Most analysts agree that the long-term perspectives for copper look bright, with its important role in the shift toward green energy being seen as an opportunity for investors.

“Copper for us — and I’d say it should be for most investors — is a long-term theme, so we’re not chasing anything in haste, and at the same time, we're always looking for new stories,” Paola Rojas of Synergy Resource Capital told INN.

For Rojas, there are myriad reasons to be bullish on copper long term. Aside from its many uses in industry, a significant portion of the batteries fueling the energy transition are made of copper. “This part of the market is poised to grow exponentially, so much that I believe it will change it in ways we can’t even foresee yet. It is already a big market — the third metal market after iron and aluminum — and elephants move slowly, so this will be a challenge,” she said.

At the same time, on the supply side, there are multiple challenges facing copper that could make investing in the metal more attractive. These include declining copper inventories, a lack of new discoveries and low investment; over the last several years there has also been a steady fall in output from Chile, the world largest copper producer.

“In this volatile environment we are keeping positions in our highest-conviction names, while adding selectively more producers, especially those with high dividend yields, such as BHP (ASX:BHP,LSE:BHP,NYSE:BHP), Rio Tinto (ASX:RIO,LSE:RIO,NYSE:RIO) and stellar juniors,” Rojas said when explaining her firm's strategy.

How to invest in copper in uncertain times

For Rojas, both jurisdiction and where an asset is in the mining lifecycle are crucial in managing expectations.

“Copper is found all over the world, sometimes in a complex country or region. When investing, this is key: If you want access to hidden gems while unlocking their full potential, you need to get comfortable with some risk and long-term thinking,” she said.

In the case of copper, for Rojas, the Pacific Rim is "ground zero," making it a good place for everyone to start. For Synergy Resource Capital, the Americas, especially South America, remain a favorite copper destination.

“There is still so much untapped potential, and these opportunities are still so undervalued that so much upside remains up for grabs,” she explained to INN, adding that her firm is also looking more closely at Australia.

And while majors are of interest, Rojas said there’s still a lot of value in copper junior miners. “Many companies are trading at 52 week lows, which is a great entry opportunity, as long as you plan to enter and stay the course for awhile,” she commented.

Some of the small caps Rojas sees getting into interesting places include McEwen Mining (TSX:MUX,NYSE:MUX), Filo Mining (TSXV:FILO,OTCQX:FLMMF), Hot Chili (ASX:HCH,OTCQX:HHLKF), Infinitum Copper (TSXV:INFI,OTCQB:INUMF), Aldebaran Resources (TSXV:ALDE,OTCQX:ADBRF), Los Cerros (ASX:LCL), Surge Copper (TSXV:SURG,OTCQX:SRGXF) and Marimaca Copper (TSX:MARI).

“Additionally, there’s stunning discoveries sitting in unconventional places, such as a secondary copper asset in a gold or silver explorer,” Rojas said. “You can get some great exposure virtually for free, getting more granular and looking at their portfolios.” In her opinion, AbraSilver Resources (TSXV:ABRA,OTCQX:ABBRF) is one example of that with its new La Coipita project.

Giving her best suggestion for looking at copper in today's market, Rojas said she believes investors can invest anywhere provided they fully understand the jurisdiction, and can de-risk the intrinsic issues with their own experience or resources.

“What can you do, at your level, due to your specific advantages, knowledge or connections, that give you an edge? That’s different for everyone. For us, this is the Americas and Australia,” she said. “Additionally, price still matters, so any additions must be at a price that feels undervalued … and don’t try to catch absolute bottoms, which is a stressful and losing game.”

For copper specifically, Rojas pointed out that after a great run last year, pricing has weakened, but a shift is coming and investors should get positioned to benefit.

“Finding and building these mines takes millions, years (or decades) and more investment needs to flow if we want to have a healthy pipeline,” she said. “Now, this doesn’t mean you have to keep your position for decades (although you could), but a minimum horizon of five to seven years is ideal.”