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By: Tim Fortier — April 21, 2021

Copper - Well Worth Your Coin

One of the core concepts we teach at TMI is the idea of using relative strength to identify the "strongest of the strong" sectors of the market.

Sometimes the difference in return between the market's average-performing and a top-performing sectors can be significant.

Such has been the case with copper.

Over the past year, the performance of copper stocks has dwarfed the returns of the S&P 500 and the Nasdaq 100.

(Click any image to enlarge)

Freeport McMoRan (FCX) has returned over 7X to the general stock market and the Global X Copper Miners Fund (COPX) has returned over 4X.  That's a lot of added coin for a portfolio!

What's behind this spectacular run and is likely to continue? It's a valid question because, as you're about to see,  there are two sides to the "copper coin."

How Much Copper Is Enough?

The transition to a global energy system that runs on renewable energy rather than finite (and dirty) coal, oil, and gas is a hot topic.

As reported at the recent CRU World Copper Conference, alternative energy systems have a high—and often, unappreciated—materials intensity.

For example, copper is a major constituent of those systems.

Three years ago, the automobile industry said "We are going to build electric cars. The electric motor itself is trivial; it’s been perfected and will last a million miles of driving easily. It’s the batteries."

They figured they'd just buy the batteries. Then the battery manufacturers said to the car manufacturers, "sure we’ll put up a giga factory, we’ll make those batteries for you, no problem."

But there is a problem...

And it's that every thousand battery electric vehicles (BEVs) produced can require approximately 83 metric tonnes (MT) of copper. Conventional vehicles on the other hand only require 23 MT.

To put this into perspective, 30,000 BEVs can consume as much copper as a skyscraper.  To turn over just 1/3 of the global passenger vehicle fleet would require placing into service more than 300 million BEVs and collectively contain 20 million tonnes of copper.

This amount is almost equal to the current annual total world consumption.

Other alternative energy sources also consume copper.

Wind turbines require 3.6MT of copper per megawatt (MW) of output.

Photovoltaic cells require 4-to-5 MT per MW.

In short, the whole entire modern grid requires copper. However, the world is yet to grasp the scale of disruption in replacing fossil fuels.

Copper is a vital part of green infrastructure from grids to wind turbines. Massive investments are needed to electrify economies.

Add on top of this demand from housing construction.

Homebuilders cannot keep up with the demand for new homes.  The U.S. housing market is 3.8 million single-family homes short of what is needed to meet the country's demand, according to a new analysis by mortgage-finance company Freddie Mac.

Given that the average single-family home uses 439 pounds of copper this represents 1.6B pounds of copper needed for future construction.

As you can see, the demand for copper is exploding.

But where does the supply come from?

Currently, Chile is the global leader in the production of copper, producing 28% of the global mined copper tonnage. The U.S. ranks #4.

How to Make  Pretty Penny from Copper

Demand for copper is so central to what governments want to do that some consider its availability a national security issue.

Complicating the matter is the fact that the global mining industry has been starved of capital for about twenty years.  So much money went into broadband, the internet, the cloud, wireless, telecommunications, that the mining industry was underinvested.

Today that's catching up to us.  The quality grades of many mines have been dropping just as world demand is surging.

This spells OPPORTUNITY.

Given the supply-demand imbalance, it appears that copper prices will continue higher.

Sector Analysis

Copper is a member of the Non-Ferrous Metals sector which is currently showing sellers are in control (column of Os).

The sector peaked in January and has been consolidating ever since.   This information is helpful in determining how we may want to approach any new buys.

Add These Two Names to Your Watchlist.

Now that you now my bullish thesis for copper, I will give you a couple of names to add to your watchlist.

Remember, generally speaking we always want to be investing in synch with the direction of the sector.

Since the sector is currently showing some weakness, I would not rush to buy the two names I am going to give you.

Rather, I would closely watch these two stocks and wait for the next reversal up in the sector BPI before adding new money.

Freeport McMoRan (FCX)

With a market cap of $53B, FCX is one of the largest copper miners in the world.  The company operates a large, long-lived geographically diverse portfolio of assets with significant proven and probable reserves of copper, gold and molybdenum.

Technically, the stock made a recent attempt to breakout but failed to do so.

Quite frankly I have seen this happen with a large number of stocks in a variety of industries and I think it is more reflective of the market in general rather than anything specific to FCX shares.

Turqouise Hills Resources (TRQ)

Lesser known and with a market cap of only $3.6B, Turquoise Hills is expanding its Oyu Tolgoi mine into one of the world's largest copper mines.

Oyu Tolgoi is located in the South Gobi region of Mongolia, and has the potential to operate for approximately 100 years from five known mineralized deposits.

With exposure to gold as well, shares of TRQ may offer investors some added diversification.

Again, with the overall market and the sector showing some short term weakness I would look to add shares of TRQ to your watchlist in anticipation of buying shares below current levels.

There you have it.  Two copper names to power your portfolio for years to come that should benefit from the bull market in copper.

Have a great week,

Tim Fortier

Editor, True Market Insiders

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