Copper prices have climbed by nearly 12% since the turn of the year, supported by a broad-based base metals recovery. It is perhaps premature to speculate that copper prices will support most copper miners' stock prices. However, investors need to remember that the commodity's price support is accompanied by lower core inflation, which could enhance mining companies' income statements.
Source: Markets Insider
Thus, with the macro outlook for copper mining stocks looking strong, here are two copper mining stocks worth considering if you are as bullish on copper as I am.
Lundin Mining Corporation
Lundin Mining Corporation (TSX:LUN, Financial) is an overlooked base metals stock. The company explores low-cost copper, zinc and nickel mines around the globe with an ethos that stresses the importance of shareholder value.
There are a few reasons why Lundin Mining is particularly lucrative in today's financial market environment. Firstly, the company recently released its three-year outlook, which signaled clear intent. Apart from anticipating higher production, Lundin Mining believes its acquisitional capital structure and cash costs on expansion projects will be more favorable than ever in the coming years.
Lundin estimates its copper production will surge in the coming years due to improved throughput from its flagship Candelaria asset. Moreover, Lundin's recently enhanced mine sequencing is finally yielding results, as revealed by its impressive cost base, conveyed by an operating margin of 25.27%. A gradual improvement of project sequencing will allow the company to expand its asset base while maintaining its compelling residual value.
Furthermore, gold and zinc operations firmly support Lundin's copper division. Lundin's gold operations could act as a critical supplement to its copper endeavors, as most analysts believe precious metals could surge in the coming year amid U.S. dollar weakness. For instance, Goldman Sachs (GS, Financial) stated in December 2022 that it believes the price of gold could surge by 25% during 2023.
Lundin's gold mining unit delivered impressive results during 2022, reaching the top end of estimates with total production reaching 86,000 ounces. More importantly, Lundin expects a more robust outlook for 2023, stating that its gold segment might yield production worth 140,000 to 150,000 ounces which, if realized, will result in a 75% year-over-year increase.
Delving into Lundin's valuation metrics provides an interesting juxtaposition. For example, the stock's price-book ratio of 1.16 is slightly elevated as natural resource stocks tend to oscillate around a price-book ratio of 1. Nonetheless, Lundin's price-earnings ratio of 10.4 is considered respectable, especially given the price support from Lundin's commodity basket.
Lastly, and probably most importantly, Lundin serves its shareholders with an excellent dividend, yielding 3.77% on a forward basis. This displays the company's ability to expand while rewarding its shareholders.
Glencore
A powerhouse is an understatement when it comes to Glencore PLC (LSE:GLEN, Financial). Glencore is a stock that many ambitious mining investors own due to the company's operational prowess and its stock's sustained total return prospects.
A reviewal of Glencore's latest half-year earnings report illustrates its ability to deliver excess value time and time again. Glencore racked up record profits during its latest half-year, achieving more than $18.9 billion in half-year profits, which is scintillating considering it is double what the company achieved a year ago.
As the world's fourth largest copper producer, much of Glencore's success stems from its copper business unit. Although Glencore struggled with lower sourced materials in 2022, it anticipates producing 1.04 million tonnes of copper in 2023. Glencore's Katanga mine (which supplies 20% of its copper mix) in the Congo struggled with electricity grid issues in 2022. However, the mine's structural issues will likely be resolved in 2023, leading to a significant ramp-up in production.
Glencore's other business units could accommodate its copper segment during 2023, given the systemic support from pandemic reopenings in China and an abated recession in the Eurozone. Glencore is running on a return on equity of 39.55% and a price-earnings ratio at merely 6.
On top of that, Glencore's stock provides an appealing dividend yield of 3.64%, accommodated by a share buyback ratio of 1.8.
Noteworthy risks
Although the price of copper is on an upward trajectory, much of its prospects could be phased out by receding storage and energy costs. Storage costs add value to commodity prices. However, recent facility costs have subdued due to the smoothening of global supply chains, concurrently softening commodity storage yields.
Furthermore, oil and gas prices are substantially lower than a few months ago, resulting in lower input costs for up-to-midstream commodity producers. In turn, this leverages bargaining power for downstream buyers and dampens premiums on commodity prices.
Lastly, the two copper miners mentioned in this article trade at premiums to their book values. Even though higher copper prices might alter their valuation frameworks, the question beckons: are these stocks already fully priced by the market?
Final word
A weakened U.S. dollar and China's pandemic reopenings have caused copper prices to surge since the start of the year. Supportive copper prices could catalyze total returns for copper mining companies, especially as core inflation continues to wane. Although risky, I believe Lundin Mining and Glencore are "best-in-class" stocks for investors seeking optimal risk-adjusted total returns in this sector.
