Strategist says copper’s ‘raging bull’ run is just beginning, and picks four stocks to cash in

Published Tue, May 25 202110:42 PM EDT

The copper bull run could be just beginning, according to investment research firm CFRA, as Chinese demand, the push toward decarbonization and South American supply risks converge. Copper has been trading near all-time highs in recent weeks and, after slipping on a warning from China over speculation earlier this week, prices picked up again on Tuesday. In a note to investors Friday, CFRA argued it remains bullish on the red metal, echoing the likes of Bank of America and Goldman Sachs, which recently characterized copper as "the new oil" and projected a multi-year bull market fueled by a surge in green capital expenditure and a dearth of mining projects. CFRA suggested the copper bull run might be in the "early to middle innings," with significantly more upside potential. Taking this into account, Equity Research Analyst Matthew Miller picked four stocks poised to outperform their peers and the broader market as a result of the rally. Four winners Over the next five to seven years, Miller identified four mining stocks that he believes are best positioned to outperform. The company has a "buy" rating on First Quantum Minerals and Southern Copper Corporation and a "strong buy" on Freeport-McMoRan and Teck Resources . U.S. miner Freeport-McMoRan is one of the world's largest publicly-traded copper producers, and also produces gold and molybdenum. Its portfolio includes the copper and gold-rich Grasberg minerals district in Indonesia, where it is ramping up mining operations, and significant operations across the Americas. "The Grasberg ramp-up will continue in 2022," Miller said. "Our 2021 adjusted EBITDA (earnings before interest, tax, depreciation and amortization) estimate of $9.4 billion is nearly double the 2020 figure, driven by higher volume and higher prices. We forecast a significant increase in free cash flow in 2021, reaching $4.5 billion, up from $1.0 billion in 2020." Canada's Teck Resources produces copper, metallurgical coal, zinc and bitumen, with copper mines operating in Canada, Chile and Peru alongside development projects throughout North and South America. Copper is set to become a larger component of the company's value, Miller said, due to a key project at one of the world's largest undeveloped copper resources in northern Chile, known as Quebrada Balance Phase 2. "QB2 is poised to double Teck's current copper production by 2023," Miller added. First Quantum Minerals runs eight mines in seven countries, plus advanced exploration projects in Argentina and Peru, and produced a record 778,911 tons of copper in 2020. Its "mega project," Cobre Panama, is expected to become one of the world's largest copper mines, producing more than 300,000 tons per year once at full capacity. Miller noted that the company has also transitioned from large annual spending to free cash flow generation, which he suggested "will quickly de-leverage the balance sheet." Southern Copper Corporation runs mining, smelting and refining facilities in Peru and Mexico, with exploration projects in Argentina, Chile and Ecuador. It produced 2.2 billion pounds of copper in 2020 and trades at a premium to its peers, which Miller said was due to the company's "best-in-class cost profile, strong balance sheet, and best-in-class reserve life index." Price outlook T he price of copper has more than doubled since bottoming out in March 2020 at around $2.11 per pound, and was trading at $4.51 on Tuesday — slightly off the record high of $4.75 seen earlier this month. With strong demand driven by Chinese stimulus and the potential for long-term growth amid the transition to renewable energy, particularly the demand for electric vehicles, analysts expect the upward trajectory for copper to continue. But while Chinese demand and decarbonization are the headline catalysts, Miller said issues around South American supply could be the "showstopper." Labor negotiations in Chile and imminent elections in both Chile and Peru have the potential to affect supply, he added. "Chile is by far the largest copper producing country (accounting for 28% of 2020 mined copper supply), followed by Peru (at 10%)," Miller said. "If you include the 7% copper supply from the Democratic Republic of the Congo (DRC), 45% of the world's copper supply is produced in regions facing political uncertainty." With regards to South America, threats of nationalization from political candidates and regulatory uncertainty mean investments in new mines could be delayed, Miller said. He also anticipates that the copper project pipeline will fall short of meeting demand, while new, major discoveries of the metal are now extremely rare. Miller argued that consensus on copper's price outlook is still far too bearish, highlighting that during the last bull run between 2001 and 2011, the price of copper rose almost six-fold. "A similar increase is not out of the question, given the fundamental drivers today are arguably more bullish than the previous cycle," Miller suggested. "Using the 2016 average copper price of $2.22 per pound as a starting point (the bottom of the previous cycle), history would suggest that prices could surge to higher than $12.00 per pound over the course of the next five to seven years."

Freeport-McMoRan oil and gas drilling in Los Angeles, part of Freeport-McMoRan Copper & Gold Inc.

Mario Anzuoni | Reuters

The copper bull run could be just beginning, according to investment research firm CFRA, as Chinese demand, the push toward decarbonization and South American supply risks converge.

Copper has been trading near all-time highs in recent weeks and, after slipping on a warning from China over speculation earlier this week, prices picked up again on Tuesday.

In a note to investors Friday, CFRA argued it remains bullish on the red metal, echoing the likes of Bank of America and Goldman Sachs, which recently characterized copper as "the new oil" and projected a multi-year bull market fueled by a surge in green capital expenditure and a dearth of mining projects.

CFRA suggested the copper bull run might be in the "early to middle innings," with significantly more upside potential.

Taking this into account, Equity Research Analyst Matthew Miller picked four stocks poised to outperform their peers and the broader market as a result of the rally.