Is It Time to Buy Copper Miners?

Third Avenue International owns 3 well financed copper miners

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Is it time to buy copper miners? Third Avenue International seems to think so. Copper was almost $4 a pound three years ago and now trades at $2.15.

Third Avenue owns shares in Antofagasta (ANFGY, Financial), Capstone Mining (CSFFF, Financial) and Lundin Mining (LUNMF, Financial). As one would think, the shares have been down with the price of copper but have rebounded as the price of copper is up about 10% this year.

Sales of Chilean miner Antofagasta were $6 billion in 2011 and fell to $3.4 billion in 2015. Antofagasta has been publicly traded in London since 1888. In 2015, the company produced 639,500 metric tons of copper at an average price of $2.28 a pound and $1.81 in costs. In 2014, it produced 703,000 tons at an average price of $3 and cost of $1.83.

At the end of 2015, the balance sheet was strong. Cash was $1.7 billion and $900 million in accounts receivable. Accounts payable were $503 million, short-term debt $759 million and $2 billion in debt. Antofagasta will continue to weather the storm.

The next miner is Capstone. Capstone is based in Canada with three producing mines in the U.S., Mexico and Chile. It estimates that it will produce 108,000 tons at a cash cost of $1.59 to $1.67. According to an investors’ presentation from Capstone, both Capstone and Lundin have the least amount of debt to EBITDA out of 15 miners. Ah hah! I see why Third Avenue bought. It is looking for companies that can survive a sustained downturn.

Capstone has $100 million in cash and $30 million in accounts receivables. The liability side shows $51 million in accounts payable and $344 million in debt. Capstone has a solid balance sheet.

The next company is Canada-based Lundin which has operations in Europe, Asia and the Americas and also mines nickel and zinc. Cash costs are about $1.32 per pound on copper. The company estimates that it will mine between 250 tons and 262 tons of copper in 2016.

Lundin shows $658 million in cash and $200 million in accounts receivables. The liability side shows $217 million in accounts payable and $983 million in debt. Like the other two, a very strong balance sheet. Paul Conibear spoke on Bloomberg TV and noted that the shelf is clear when finding M&A targets in copper mining. Lundin is concentrating on its mines.

Looking at a 10-year chart on copper, it was almost $4 a pound in 2008 before it crashed to $1.59 in 2009. After that, it skyrocketed to almost $4.50 in 2011. Since then, it appears that it has leveled off at the $2 to $2.15 range. It has been in that trading range for several months. Barron’s put out a negative piece on the commodity stating that there is oversupply and that China may cut its power grid consumption.

So which to buy of these three? You can see what Third Avenue is doing. It owns a large cap, mid cap and small cap. Antofagasta has a market cap of $6.4 billion, Lundin $3.1 billion and Capstone $251 million. Really, Capstone is a penny stock. As these three are tied to the price of copper, they will be quite profitable in any rise in the commodity. Their cash costs are all soon to break even. If copper can climb to the high $2 range, these stocks ought to do quite well.

Disclosure: We own none of the stocks mentioned in this article.

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