Copper Stocks: Freeport McMoRan, BHP, Teck, Glencore, SCCO | Investing in Copper in 2024 & Beyond

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In this video, we look into some of the largest copper miners on the planet: Freeport McMoRan (NYSE: FCX), BHP (NYSE: BHP), Glencore (LSE: GLEN.L), Teck Resources Limited (NYSE: TECK) and Southern Copper Corporation (NYSE: SCCO).

With so many trends and especially electric vehicles requiring a massive amount of copper, this metal should play an even more important role in our future. Even though copper is not that cheap right now, I think it’s better to prepare today and be ready in case a crash happens tomorrow.

Now, with copper, similar to a majority of commodities, China plays a key role in the price. Even if the company you invest in has no business with China whatsoever, the country represents around half of the global demand, so if they have an issue, the total demand goes down and usually drags the price down with it. If I had to choose, I would say this is more of a risk rather than an opportunity because you depend way too much on a single country, but in the future, according to studies and expectations, they should represent a smaller slice of the pie. But, until then – or, if it happens – China is probably the number one factor for the price.

Speaking of studies, there is a 100-and-something-page study from S&P Global that looks into and is even named The Future of Copper. Among other things, they look into two scenarios based on the supply and demand for copper.

As you can see, a lot of copper demand should come from EVs and the grid, infrastructure, storage and everything related to that, plus wind, solar, and a bit of growth in the current uses.

After looking into some more risks and potential reward of investing in copper, we begin with Freeport McMoRan (NYSE: FCX) before getting into BHP, Glencore, Teck and Southern Copper. This stock is a perfect representation of what you can expect from a copper mining company. They had more down 80%, up 400% or even more in a matter of months than probably any other big company you can find. I remember how back in 2020 with the fear caused by the pandemic, the stock fell to around $5 and everyone was afraid that they would go bankrupt or sell assets and stuff like that. However, exactly two years later, they were up around 850%, making this probably one of the best performers during that time.

I also briefly look into other sectors where some of these companies have exposure: potash, zinc and even coal.

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0:00 Investing in Copper in 2024 & Beyond
4:25 Copper Stocks: Copper Stocks: FCX, BHP, TECK, Glencore, SCCO

#stocks #investing #personalfinance #valueinvesting

Hey, welcome back! With so many trends and especially electric vehicles requiring a massive amount of copper, this metal should play an even more important role in our future. Even though copper is not that cheap right now, I think it’s better to prepare today and be ready in case a crash happens tomorrow.

Now, with copper, similar to a majority of commodities, China plays a key role in the price. Even if the company you invest in has no business with China whatsoever, the country represents around half of the global demand, so if they have an issue, the total demand goes down

And usually drags the price down with it. If I had to choose, I would say this is more of a risk rather than an opportunity because you depend way too much on a single country, but in the future, according to studies and expectations, they should represent a smaller slice of the pie.

But, until then – or, if it happens – China is probably the number one factor for the price. Speaking of studies, there is a 100-and-something-page study from S&P Global that looks into and is even named The Future of Copper.

Among other things, they look into two scenarios based on the supply and demand for copper. As you can see, a lot of copper demand should come from EVs and the grid, infrastructure, storage and everything related to that, plus wind, solar, and a bit of growth in the current uses.

Now, scenario one, they expect a very significant 1.6 million metric ton gap between the supply and demand. To put it in perspective, the highest gap in about 25 years was around 1.25 million. Add the fact that they expect a whole decade of supply gaps before that, and you can see

The price of copper go up even more. However, this was the positive scenario. In the second, they see this gap reaching 9.9 million metric tons which – I’m not kidding, could make the miners 100-baggers or even more.

This kind of gap would be unheard of, but always take any estimation with a grain of salt. If you look into the study, I think they might’ve been a bit too optimistic with the supply growth, and I don’t have to tell you how big the difference between a million and ten would be.

But, even a gap of a million would be very good for copper, especially if it goes on for more than a decade. Anyway, more about that study and copper and nickel in this video. Right now, copper is not at its peak, but it’s far from being cheap.

As you can see in the study, this is a matter of supply and demand. Yes, in the long-term, we know that there should be a pretty big increase in demand, but what about the supply? As you are about to see, after having a couple of good years, pretty much every copper company

Out there is investing in production capacity. And this is normal for any commodity. You know, prices go up, you make a lot of money, increase production, you disrupt the supply and demand balance, the price goes down and so on.

Even in the 10 million tons gap scenario, copper can still fall to $2.5 or $2 in a couple of years. A decade for commodities can even mean like 2 whole cycles, so we have to be ready. But, we have to think about the risks.

If we see for example carbon nanotubes becoming a popular replacement, this can really affect the demand for copper. Normally, this kind of risk is impossible to predict or value, but at the very least we can keep it in mind and look for a margin of safety.

So, other technologies can affect the demand of copper – however even if it gets replaced in one area, there are many others that can sustain the demand. I looked into lithium recently, but the issue with that is the fact that most of it is and will be used in batteries.

If we get a technology that doesn’t use lithium or uses less, then the price of lithium and the future of the industry can really be in trouble. From that point of view, copper is much more diversified. Now, remember that mining, especially if not in North America, Australia or the EU, poses

A lot of risks. Take a look at Glencore’s Wikipedia page for example – you can’t even fit the recent history of scandals on like 2 screens. Sure, the impact of these issues on the stock was not significant, but what if the next one is?

Look, it’s impossible to predict such an impact because any of these companies can just be some rich people’s toy and once they are done or caught doing something bad, you are left holding the bag. In some cases, financials and every positive thing about a company would mean nothing.

You know, not every company is like this, but this is a risk to remember. And you know, it can happen in any country. Now, let’s begin with the biggest public copper producer – Freeport McMoRan. This stock is a perfect representation of what you can expect from a copper mining company.

They had more down 80%, up 400% or even more in a matter of months than probably any other big company you can find. I remember how back in 2020 with the fear caused by the pandemic, the stock fell to

Around $5 and everyone was afraid that they would go bankrupt or sell assets and stuff like that. However, exactly two years later, they were up around 850%, making this probably one of the best performers during that time.

This is a classic commodity stock – when copper is low, nobody wants to buy, but when the price of the commodity goes up, everyone tells you to buy them and this is how they jump like 3, 5, 8 or even 10 times.

They have projects in the Americas – especially North America – and Indonesia, all of these regions producing a pretty similar amount of copper. However, in Indonesia, they also mine gold as a by-product, so even with relatively high royalties and duties, the net cash cost for copper in Indonesia is like 10 cents.

By the way, this is both the second largest copper AND gold mine on the planet. So, you can see why they invested so much there recently. They provide this rough estimation of the operating cash flow but only for copper at $4, $4.5 and $5, but what if it goes to $3 or $2.5.

Well, that’s when the issues might begin. Maybe they won’t lose money, but what happens with all their projects? They would probably have to borrow and just make the balance sheet worse. They estimate CAPEX of $3.6 billion this year, but without Indonesia which is another billion just for what you see on the screen.

But, this new project should be operational later this year, or maybe next year, so in a couple of years, the CAPEX might normalize a bit. Now, they can produce quite a bit of money. In 2021 when copper jumped to almost $5 per pound and stayed around $4.5 for a whole year,

They produced a free cash flow of $5.6 billion. This was also because they didn’t have high CAPEX so you can say it was kind of a perfect year that started a big investing cycle. Assuming that in the long-term, the CAPEX without a lot of investing normalizes at let’s

Say $3 billion, which might be pretty high, they probably break even when copper is at around $2.5. This is a pretty good margin of safety. They have current assets of around $14 billion, which is enough to cover the $5.8 billion in current liabilities.

The total liabilities reach around $25 billion, but with about $38.5 billion in long-term assets, I wouldn’t worry too much. They target to give around half of the cash flow as dividends and buybacks, which is why, in this case, this metric is even more important. However, today, this is very expensive.

The market is trading it at like 11 times what they can produce in a very good year, which for the current capacity is a ratio of around 110. Keep in mind that 4 years ago, the stock was at around $5, meaning 8 times cheaper than today.

The company is ok, but definitely not a buy at this price. And look, the point of the video is to be ready for when the cycle goes down, not to find something to buy right now. You know, when they get to around $15 billion, meaning a price of around $10.5, then it might

Be time to accumulate. I know commodity companies can be pretty attractive and you can get this kind of fear of missing out when looking at them in good years and they show you these estimations with copper growing so much, but these are commodities.

Again, not even half a decade ago, the main headline was this company risking bankruptcy because copper fell below $2.5 for a couple of weeks. And, this is investing in cyclical industries. Copper is at pretty high levels, but others – like lithium or platinum – are getting to very interesting prices.

Anyway, getting to the second company: BHP. They are a diversified miner with operations in the Americas and Australia. They make money from iron, copper, coal – both metallurgical and thermal – and several others, including nickel and a big investment in potash.

Potash is a very important mineral used in fertilizers and this project would increase Canada’s output by more than 20%, and Canada is by far the largest producer on the planet. So, this is definitely something to keep in mind, especially since Phase 1 should become operational in about a couple of years.

They see the CAPEX in the medium-term to reaching around $11 billion per year, but a lot of it is going into what they call future-facing commodities. They have $23.3 billion in current assets, which is enough to cover the $19 billion in current liabilities.

They also have $78 billion in long-term assets, which is more than enough to offset the roughly $34 billion in long-term liabilities if needed. They have a pretty big debt maturity coming this year, but after this, it shouldn’t be a problem.

During a bad year, they can make a free cash flow of around $5 billion, $10 to $15 during average ones and even as much as $20 to $25 billion in good ones. They target a dividend payout ratio of at least half of the profit, so on average, you

Can probably expect something like $2, $2.5 per year. So, a 3-4% dividend on average, which is better than McDonald’s, JnJ, Pepsi and so on, because you also get more potential to grow. They also target to gradually get out of thermal coal and focus on nickel, copper, potash and

So on, which for me is definitely a plus. By the way, one thing to keep in mind about BHP and also Vale, there is a potential more than $50 billion fine for a dam failure from about a decade ago.

Plus one of the biggest class action lawsuits in history claiming about $45 billion for the same event. We can’t know the outcome and this has been going on for quite a few years, but it’s definitely a risk.

Once again, $160 billion for this is maybe too much, but something like $100 or $80 – meaning a stock price of around $30 – $40 – is much more interesting. Now, let’s look into Glencore. Talking about cyclicality, this company’s graph is the perfect example.

They have a pretty interesting dividend and buyback policy, because they pay a fixed $1 billion, plus a minimum of 25% of the free cash flow if they meet the net debt target. A year ago, they paid back around $9.3 billion in dividends and buybacks, meaning a return of around 14%.

The issue with the buybacks is that they don’t really think too much when they do them. Obviously, if they have money, it’s during a good year. If it’s a good year, the stock is up, so they waste a lot of money on buybacks at the wrong time.

They mine pretty much the same as BHP, meaning mostly coal, copper, zinc and nickel with operations everywhere on the planet. They mine copper at very cheap prices when including the by-products, but I want to emphasize once again the risk of investing in this kind of company. Will the new management be any different?

Who knows. Anyway, normally, they spend about $4 billion in CAPEX, but again, we can see a lot of investing following a couple of good years. Recently, they had this $7 billion acquisition of Teck’s met coal business, and this is getting me to a point I want to make.

As you probably know, there is thermal coal, used for energy, and there is metallurgical coal used in the steelmaking industry to make coke. Now, both of them pollute a lot, but for thermal you have nuclear power, gas, solar, wind, and so on if you want a more eco-friendly alternative.

However, with met coal, there isn’t really some widely accepted alternative that would make sense from a financial point of view. You can use hydrogen for example, but who would produce enough, who would transport it, who would store it, and so on?

If you think about it, replacing this with anything should be done with a lot of care, because even a 10-15% increase in the price of steel can lead to a global financial crisis. However, with the direction we can see with China and every other major economy phasing

Out of coal in the following decades, this is a pretty risky industry to be in. I think met coal is maybe a hold in my opinion. If you have the production capacity, use it and maybe look into selling it, but definitely don’t buy it today.

Now, you know, the phasing out is gonna take more than 2 decades and they paid like 4-5 times the EBITDA, so maybe it’s not that bad, even though it’s more than you normally see coal companies being sold for.

In a good year, they can make even as much as $10-12 billion in free cash flows, but keep in mind that coal is the number one source of income. And this is before the acquisition. Normally, I would expect around $5-6 billion.

They have $57 billion in current assets and 45 in current liabilities, but most of this is in inventories, which could be a problem. Overall not that great when adding the acquisition. And this is my general opinion about Glencore.

Talking about Teck, they are also a pretty big copper miner, as well as the number one producer of zinc, with operations in the Americas. They have a very good production cost, which is one of the main advantages you can look for in a mining company.

About the Glencore deal, Teck is going to keep the money that the company makes until it is over in Q3 this year assuming that it doesn’t somehow get blocked. That’s another $1 billion in cash flow expected. After the deal, they want to focus on reducing the debt, funding the growth of their copper

Operations and even pay a significant dividend. More on this will come after the transaction is over, but if they give half of that money that’s like a 20% dividend. What’s left is basically the good stuff that Glencore was willing to overpay quite a lot for.

So, Teck is definitely the winner in this deal. Zinc has a lot of uses, from galvanizing and alloys to batteries, fertilizers, paints, coatings and so on. The price is kind of similar to that of steel since galvanizing represents more than half

Of the demand, but there is a bit of potential to grow thanks to batteries. So, from this, you can expect a bit of long-term growth, with the normal volatility. However, Teck’s zinc mines seem to be pretty old, and they are assessing if they should go for life extension options right now.

Anyway, they invest a lot and divesting coal and focusing on copper is really what I want to see from a company in this position. Even before selling the coal business, they plan on doubling the copper production in about a year from now, reaching a capacity of around 600 thousand tons.

Right now, it’s very tough to estimate how much they can make. Coal is basically over half of the company, so all the data before the transaction is highly impacted by the price of coal. We can see an estimated impact of changes in the prices of copper and zinc.

In the future, if the production gets to 600 for copper and 700 for zinc, the impact should be roughly around $8.5 for copper and $6 for zinc. What it means is that a one dollar change per pound in the price would increase or decrease

The profit by around $850 million for copper and $600 million for zinc. By the way, $1 for zinc is massive, but for copper it’s not unheard of. In the future, a majority of their income will come from copper from the looks of it.

They also plan to have a base dividend of 50 cents per share, plus 30% to even 100% of the cash flows that would be left. That’s a minimum of 1.2%, plus maybe even as much as 5-6% for the current price. And this is before the transaction.

The balance sheet is, again, impacted a lot by coal. Adding a bit below $9 billion in cash after taxes, they could pay back a significant amount of debt. What’s left would be a low-cost copper and zinc producer, without a lot of debt, and

A decent amount of growth thanks to quite a few projects. This is definitely something to look into after the transaction is approved. Now, the fifth company in today’s video has the lowest production cost. What’s even more interesting is the duration of their reserves.

They have mines and projects in Mexico and Peru, and they have probably the largest reserves on the planet, lasting around 6 decades at the current production rate. To put it in perspective, they have around half more copper than Codelco or Freeport, which are massive companies in comparison.

So, this is a lifetime worth of low-cost copper. With the current assets of around $4.5 billion covering the current liabilities more than 3 times, they shouldn’t have short-term issues, and from the looks of it, the long-term should also be fine.

They can produce a free cash flow of around $2 billion on average, plus or minus one, one and a half in good or bad years. Again, not attractive today, but so far in bad times, they went to around 10 times the average, which would also be my buying target.

That’s a price of around $25 to $30 per share. You know, it’s very tough not to make money when you literally mine cheaper than almost everyone else on the planet. The dividend is what you can expect from this kind of company, and if you buy around $30,

You get pretty much double-digits in good times. They also do buybacks from time to time, but nothing too impressive. A downside I have to mention is that 88.9% of this company is owned by Grupo Mexico, so you depend on whatever they decide.

Imagine you buy today, the stock crashes in half, and they decide to make it private. Even if you buy at very low prices, they can cut you out whenever they want and you miss out on all the upside.

This is a very serious risk to consider, especially if copper becomes an even stronger commodity from a political point of view. They also produce a bit of silver, zinc and molybdenum but copper is the main focus. Once again, lots of investments are coming, so think about the supply and demand balance for copper.

Will the demand really keep up with all the extra production? A few days ago, a company backed by Bill Gates and Jeff Bezos even discovered a high-grade copper reserve in Africa that could become one of the top 3 mines on the planet.

This kind of thing could even balance that supply gap in a decade from now, so don’t invest thinking it’s something guaranteed to happen. Anyway, balancing the risk and reward, this is still a pretty good company to keep in mind.

In my opinion, copper is probably one of the best metals from an investing perspective. It’s very useful today, and it should be even more useful for EVs, Smart Cities, 5G, and so many other future trends. These companies are ok but again, not a buy at the current price.

When copper falls below $3 again, then we might see some real opportunities. Today, the market seems to be pretty hyped about copper and as a result, many copper miners are traded at more than they should. But, you know commodities and the market can be, so things can get very different in a

Couple of months. If we get into a recession, this type of company is definitely on the buy list. As always, what I cover in my videos shouldn’t be enough for you to make any investment decision, so please do your own research before investing in anything.

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