As inflation jitters slam much of the market, mining stocks of all sorts have defended their healthy gains this year, as expectations for a post-coronavirus economic rebound help drive surging prices for copper, iron ore and aluminum.
Metals are indicators of a recovering economy. That’s especially true of copper, which has broad applications in products including pipes, wiring and cables, power generation equipment and semiconductors, making it highly sensitive to macro-level changes in demand.
Copper prices traded below $3 a pound from June 2018 through last August. They then upshifted, hitting $3.51 by the end of the year. Over the past two weeks, prices have spiked past their January 2011 record to more than $4.79 a pound.
For copper producers, that means it’s time to make hay. The leading question now is how quickly can they revive supply as prices soar for the red metal. Analysts increasingly tie long-term bullish outlooks for copper prices to green energy and electric vehicles. But demand from China, and from global construction and power production markets, remains key.
Mining Stocks Outpace Market
Mining stocks have responded. The 34 stocks in IBD’s Mining-Metal Ores industry group have collectively rallied more than 27% this year. The group ranks a very strong No. 21 out of the 197 industry groups tracked by IBD for six-month performance.
Some of the strongest gains have come from copper specialists. Shares of Freeport McMoRan (FCX) has climbed more than 61% since Dec. 31. Southern Copper (SCCO) is up not quite 22%, and on the verge of a possible breakout.
BHP has a year-to-date gain of 18% and is flirting with a buy point. Rio has a gain of more than 26%. Vale has a 31.3% gain. Vale is extended from a recent breakout. Rio has clipped back into a buy range above an 88.83 buy point.
Mining Stocks And Bullish Views On Copper Prices
Many factors play into rebounding copper prices and demand. Foremost is recovering economic growth in China, the U.S. and Europe. The depreciation of the U.S. dollar also helps fuel the rally. And the Biden administration’s $2.3 trillion infrastructure proposal includes vast support for copper-intensive electrical grid expansion and public works projects.
The Biden plan also includes $174 billion to promote EVs and build charging stations — markets that are becoming increasingly linked to copper.
“We’re all kind of caught up in a world in recovery mode, everyone is happy that the vaccines are rolling out and the end is in sight,” said Ronnie Cecil, a U.K.-based metals and mining analyst at S&P Global Market Intelligence. “That kind of sentiment, along with President Biden’s infrastructure plan, which bodes very well for EVs; the fact that China is still booming; and the green energy revolution — it all paints a very bullish picture for copper.”
Shifting Copper Markets, Potential Shortfall
Worldwide copper production will rise only 2.5% to 21.1 million tons in 2021, forecasts consultancy CRU Group. It says copper mining operations in Chile and Peru, which account for some 40% of global copper output, have pulled back on activities to protect workers amid the Covid-19 pandemic.
China has been the biggest driver of copper consumption since the turn of the century.
More than 60% of the copper produced is used in cables and wiring, according to the International Copper Study Group. Tubing and sheet copper each consume about 12% of annual global output.
But markets are shifting. One view is that underinvestment in new mines will lead to a shortfall in supply as new copper uses emerge, such as in wind turbines.
Analysts disagree on how high demand and prices will go. UBS analyst Andreas Bokkenheuser, in a March report, threw cold water on talk of a new commodities supercycle.
Copper Supercycle: Will Green Energy Usurp China?
“The supercycle argument of copper heading to $10,000/ton and beyond lacks one key support factor: China,” he said in a report. “As the country’s economic recovery continues, the government is tightening construction stimulus.”
Bullish copper forecasts lean in part on emerging industry segments such as wind turbines and electric vehicles. A Goldman Sachs report in April titled “Copper is the New Oil” said “the critical role copper will play in achieving the Paris climate goals cannot be overstated.”
Goldman Sachs forecasts that copper prices will likely reach $15,000 per ton by 2025.
“We estimate that by mid-decade growth in green demand alone will match, and then quickly surpass, the incremental demand China generated during the 2000s,” the report said.
In 2021, copper cathode demand from electric vehicles and renewable energy will grow over 15% and exceed 1 million tons for the first time, says CRU Group. However, that represents only around 5% of the total market.
Although onshore wind turbines tend to be taller, offshore wind is significantly more copper-intensive, owing to the cabling needed to return power to the grid, analysts say.
Wind Turbines To Drive Copper Demand?
Wood MacKenzie forecasts that global wind turbines will consume over 5.5 million tons of copper, cumulatively, by 2028. And Goldman Sachs sees wind-related copper demand reaching 1.3 million tons a year by 2030, growing at a rate of 12.4% a year.
Electric vehicles will also play a role, says Goldman Sachs. It forecasts that worldwide EV production will jump to 31.5 million vehicles a year by 2030, up from 5.1 million in 2021.
“Electric vehicles have more than five times the copper of ICE (internal combustion engine) vehicles and by the end of decade they will account for around 40% of the green copper demand,” said the Goldman Sachs report.
Morgan Stanley, in a green energy report, forecasts that copper demand for the light vehicles category will grow to 3.4 million tons by 2030, up from 1.6 million tons in 2021, as EVs replace gas-consuming cars.
But copper is a particularly tricky commodity. Visibility on future supply has always been problematic for long-term forecasters, noted the Morgan Stanley report.
The highly cyclical mining stocks can be equally hard to predict. Analysts contend that mining companies will be cautious about ramping up capacity, mindful of the copper price collapse in the mid-2010s. Mining stocks took a beating in 2015 as demand from China and elsewhere slowed.
Mining Stocks And Greenfield Copper Projects
While CRU Group forecasts a 2.5% rise in worldwide copper production this year, that is up nearly 32% from 16 million tons in 2010. The big question: If copper prices hold around the $8,800 per ton (about $4 per pound) range, how much would that incentivize mine developments?
“The copper price has gone stratospheric and probably has further to go, which is a boon for miners who are currently making at least two dollars for every one they spend getting metal out of the ground,” said Robert Edwards, CRU Group’s base metals analyst, in a report.
An RBC Capital report underscored U.S. dollar weakness as a factor in driving up copper prices. In addition, “supply fears and increasing speculative positions are pushing copper to new highs,” RBC Capital said.
Morgan Stanley notes that mining companies may struggle to bring on supply by 2025, impacting mining stocks. But by 2030, new supply should be sufficient to meet demand. Greenfield projects take eight years on average to bring online, said Morgan Stanley analyst Susan Bates in a report.
Besides the U.S. publicly traded mining stocks, Chile’s Codelco and Antofagasta are among the biggest copper mining companies. Switzerland-based Glencore is the world’s largest mining operation, with significant holdings in copper. But more than half of its $142 billion in 2020 revenue came from coal and other energy products.
Other big miners include Australia-based OZ Minerals and China’s Zijin Mining Group.
High Copper Prices Attract Supply
S&P Global Intelligence expects mine expansion projects to ramp up in Indonesia, Peru, Serbia, the Democratic Republic of Congo and Tibet in China. It forecasts that copper production will rise by 4.5 million tons, or roughly 24%, by 2025.
“A world of very high prices attracts supply; supply will come,” said S&P’s Cecil. “There are a number of projects in the pipeline that will impact the market over the next few years. One of the key ones already up and running is the Grasberg Block Cave in Indonesia; that’s Freeport’s mine. There are a few projects in Latin America. That’s why prices could soften from the levels that we’re currently seeing.”
AllianceBernstein Research, in a February report, said 72 greenfield copper projects are underway globally but many are in very early feasibility studies. Most of the projects are unlikely to come to market, the note said.
Arizona’s Resolution Copper Project Set Back
The U.S. and Australia are among countries with the biggest copper exploration budgets. The Biden administration in March, however, put the brakes on a land swap deal that would have cleared the way for the Resolution Copper mine project in eastern Arizona.
The Resolution project is a 55/45 joint venture between mining stocks Rio Tinto and BHP Group.
A copper deposit was discovered in the Tonto National Forest in 1995. Rio Tinto and BHP have invested over $2 billion into the Resolution copper project since the early 2000s.
Native American tribes oppose the land swap, in which Restoration Copper would obtain 2,400 acres of national forest in return for other territory in Arizona. Other new copper projects in Ecuador, Mongolia and Alaska also face local opposition.
While refined copper accounts for most global production, roughly 20% comes from scrap. In addition, copper production could increase if aging mines with lower-grade metal can improve operations.
Will Rising Copper Prices Spur Aluminum Substitution?
Startup Jetti Resources is working with some companies on a new technology that extracts copper from chalcopyrite, an abundant copper mineral ore.
If copper prices stay near 10-year highs, one question is whether customers would substitute aluminum or other metals in some applications. Copper’s conductivity gives it an edge, but in some situations, aluminum is a viable alternative.
In the case of wind turbines, the Morgan Stanley report said, “Copper is currently trading at four times the aluminum price, making aluminum a tempting prospect for wind farm developers, despite its 39% lower conductivity.”
Mining Stocks See Iron Ore Prices Soar
At Freeport McMoRan, which garners nearly two-thirds of revenue from copper sales, the view on the copper price outlook is bullish.
“The demand side to me is in a new era and it’s really positive, and the supply side — I don’t know how it’s going to keep up with it. I literally don’t,” Chief Executive Richard Adkerson said on the company’s first-quarter earnings call with analysts.
“Unless there’s some global calamity, prices — it just seems to me — clearly have to rise substantially.”
Iron-ore producers and uranium plays also have been top performers in IBD’s group of mining stocks. Iron ore prices recently hit record highs. Spot iron ore prices in early May broke $200 a ton for the first time.
Steel demand is surging as economies chart a path back to growth just as operational issues hamper the world’s biggest miners, tightening ore supply.
Vale, the biggest producer in Brazil and No. 2 worldwide, has overcome a disruption at the Guaiba Island shipping terminal, analysts say. Meanwhile, Vale stock is mulling a potential spinoff of its base metals division as part of a strategy to target the electric-vehicle sector.
ESG Investing Implications For Mining Stocks
For all mining stocks, the rise of environmental, social and governance investing principles, or ESG, presents challenges.
Rio last year saw its chief executive resign after the company destroyed two ancient Aboriginal caves in Western Australia in an effort to reach the iron ore beneath them. Vale has dealt with the fallout of two mining disasters in Brazil.
“When it comes to ESG, it wasn’t discussed 20 years ago,” said S&P’s Cecil. “Today it’s a key metric investors are paying attention to. As a result, mining companies are becoming very sensitive to ESG issues.”
On the other hand, uranium producers — long tied to public worries over nuclear energy — may be in for better days. Cameco (CCJ) stock and ETFs such as North Shore Global Uranium Mining (URNM) and Global X Uranium (URA) have perked up.
Despite its shift to solar and wind electrical power, China still has nuclear power plants planned or under construction. Some Middle Eastern countries also plan to bring nuclear reactors online.
Most uranium mining takes place in Kazakhstan, where Cameco operates. Cameco has yet to resume production at its McArthur River plant in Canada.
Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on 5G wireless, artificial intelligence, cybersecurity and cloud computing.