3 Potential Copper Beneficiaries

Copper stocks could surge amid bullish rhetoric from Wall Street

Summary
  • Various Wall Street analysts believe copper prices could proliferate in the coming year.
  • Most copper stocks have favorable valuation metrics and dividend yields.
  • Glencore, BHP Billiton and Freeport-McMoRan look 'best-in-class' in my opinion.
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Copper prices are expected to surge in 2023, with various analysts on Wall Street anticipating a significant supply versus demand arbitrage. For example, according to a recent report by Goldman Sachs (GS, Financial), "Peak supply is now immovably fixed in mid-2024… generating deficits from that point."

The thought process behind the bullish copper price sentiment is uniform from what I've seen. Analysts are anticipating China's lockdowns to ease, stimulating demand while production in eastern Europe and Russia could remain depleted due to the war.

Whether copper prices settle higher or not in 2023 is debatable in my view, given that we could see reduced demand from the U.S. in the case of a recession. However, if prices do go higher, the following three companies are some of my favorite copper plays as I believe they are "best-in-class" in terms of their quality and outlooks.

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Glencore

Glencore PLC (LSE:GLEN, Financial) is a South African multinational mining powerhouse. The company operates throughout the precious metals value chain by exploiting primary production, processing and trading activities. Glencore is the world's fourth-largest copper producer, allowing it to establish a powerful market position.

According to Glencore's latest financial report, it produced record half-year profits, contributing $18.5 billion versus last year's $8.65 billion. Higher copper prices and reopenings from Covid restrictions undoubtedly provided Glencore with abnormal tailwinds. Nonetheless, its year-over-year growth speaks volumes. Furthermore, Glencore announced a $4.5 billion shareholder compensation plan in the form of stock buybacks and dividends.

A significant appeal to Glencore is its high-volume acquisition strategy. The company's proclivity to expand its asset base provides its shareholders with residual value growth prospects and lucrative redistribution of capital. For example, the company recently agreed to acquire Newmont's (NEM, Financial) "MARA Project," providing it with exposure to a long-life copper and gold asset in South America, which is considered a lucrative low-cost mining jurisdiction. Moreover, Glencore could benefit from valuable renewable energy synergies as its plans to emphasize its zero emissions pipeline.

Glencore's stock seems to have high potential from both a valuation and dividend vantage point. The 3.95% dividend yield is accompanied by a price-book ratio of merely 1.83.

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BHP Billiton

BHP Billiton (BHP, Financial) is one of the primary year-to-date breadwinners for copper stock investors, exhibiting nearly 20% in capital gains. The company's diversified business model allows it to phase out idiosyncratic risk while maintaining high-quality regional exposure.

The company operates Escondida, which is the largest copper mine in the world. In addition, BHP's copper endowment fund is the largest in the world, providing an indication of the company's dominance within the metals space.

Adding to BHP's copper operations are its coal operations. Coal demand might surge in the near-term amid energy shortages in Europe, which could benefit BHP, considering its substantial coal industry positioning with critical assets such as the Bowen Basin in Queensland, Australia.

BHP derives a lot of value from the company's economies of scale and efficient income management. BHP's price-earnings ratio of 5.51 indicates that the stock could be undervalued as long as it maintains or increases current earnings levels. Additionally, its dividend yield of 10.16% could attract income investors.

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Lastly, BHP could benefit from momentum as it has outperformed the broader market during the past 12 months, providing it with a potential "follow the herd" tailwind.

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Freeport-McMoRan

Freeport-McMoRan (FCX, Financial) is the world's second-largest copper producer and eclipsed expectations once more in its third-quarter financial results. The company achieved a year-over-year sales number that was 3% above guidance. On top of that, Ebitda was $1.5 billion, indicating significantly strong profitability.

Furthermore, Freeport has retired more than $1.1 billion in debt since the start of the year, which adds tremendous value for its equity stakeholders.

As with BHP, much of Freeport's latest success is due to its global footprint, allowing it to achieve economies of scale and price smaller competitors out of the market amid volatile supply chain conditioins. The company operates seven mixed metals open-cast mines in North America, two copper mines in South America and one of the most substantial copper and gold mines in Papua New Guinea's Grasberg minerals district.

Much is anticipated of Freeport's Lone Star Project located near its Safford development in Arizona. Completed in 2020, the project is expected to reach a total copper production of 300 million pounds per year, enabling the company to leverage its regional market share. The Lone Star project is one of many low-cost, high-quality assets that Freeport owns, which explains why the company is running on an operating profit margin of 33.61%.

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Freeport stock's valuation and dividend attributes aren't great. However, a dividend yield of 1.55% and a price-earnings ratio of 14.67 can be considered respectable. In addition, Freeport's GuruFocus momentum rank outranks 71.64% of its sector peers.

Concluding thoughts

Copper stocks could benefit from higher copper prices in the coming year. If this scenario comes to pass, the likes of Glencore, BHP Billiton and Freeport-McMoRan could be among the primary winners in my view due to their robust operational performances and attractive valuation metrics.

Disclosures

I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure