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Copper Stocks for Inflation: FCX, SCCO, RIO, BHP | Freeport McMoran | Rio Tinto | Copper Stocks - YouTube
Channel: The Newbie Investor
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Copper has skyrocketed over the last 12 months,聽
gaining more than 100% since the COVID crash,聽聽
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but many analysts still agree that聽
there is a lot of upside to it.聽聽
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Today, I am talking about why I am bullish聽
on copper and I will look at my top 4 copper聽聽
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stocks that you can buy to profit from both聽
inflation and the increasing price of copper聽聽
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so if you want to learn more, like聽
this video and keep watching.
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Copper is trading at a very high price, but if聽
we take a look at the charts, we can see that聽聽
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it is starting to slow down a little bit and now聽
trades around $4.4 and $4.5 per pound just above聽聽
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its 50-day moving average. To me, this looks like聽
the perfect time to buy copper stocks. Why?
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Well, there are two strong bullish聽
arguments about copper. First of all,聽聽
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there are the supply shortage concerns. Some of聽
the world's biggest mines are in Peru and Chile,聽聽
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which have had some political issues lately with聽
possible increased taxation on mining which could聽聽
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affect the production numbers. China has also聽
started to build up massive copper stockpiles聽聽
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which is concerning. Analysts also think suggest聽
that there is roughly 8 million ton gap between聽聽
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supply and demand over the next 10 years which聽
is the biggest gap that we have ever seen in the聽聽
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copper markets and it could lead to copper prices聽
rising between 60% and 120% over the next 5 years.聽聽
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The US CPI index is also picking this up as we聽
saw a 6.5% increase in broad commodity prices聽聽
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which is the biggest that we have seen in 20聽
years and perhaps longer! There are certainly聽聽
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some massive copper projects being developed right聽
now, but the quality and size are not comparable聽聽
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to what we were seeing ten years ago and the聽
project approval rate has generally been slow.聽聽
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This leads me to my second bullish argument. Not聽
only do we have a supply shortage, but there is聽聽
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also increased demand. Banks are now calling聽
copper the "new oil" because of its importance聽聽
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in replacing oil with renewable energy. Copper聽
is used in batteries, it is used in renewable聽聽
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energy systems, wires, cables, ribbons, inverters,聽
pretty much anything electrical has some copper in聽聽
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it because the metal is an excellent thermal and聽
electric conductor. Silver has better qualities,聽聽
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but it is also way more expensive. Literally, a聽
hundred times more expensive! So, copper usage聽聽
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in renewable energy systems is roughly 5 times聽
more than in traditional energy systems and,聽聽
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given the quick and substantial shift towards聽
renewable electricity all over the world,聽聽
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we can expect the demand for it to jump even more.聽
Add to that the rise in electric vehicles and the聽聽
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fact that they also tend to use 4-5 times more聽
copper than normal vehicles and we start to see聽聽
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why prices can jump even higher especially when聽
combined with the possible supply shortage. By聽聽
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the way, the copper price increase is also one聽
of the drivers of the rising electricity prices聽聽
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which were up 4.2% in May, the highest increase聽
in 7 years, so if you are invested in renewables,聽聽
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electric vehicles, electric utilities, buying聽
copper miners can be an excellent hedge.
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Before I tell you my top copper stock picks,聽
I want to address the main risk associated聽聽
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with copper miners and that is the price聽
of copper plateauing or even falling a bit.聽聽
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The Chinese government has also recently spoken聽
about controlling the jump in copper prices聽聽
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so we could see it remaining at its current聽
level or even dropping a little bit.聽聽
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Demand could also decrease which聽
will lower the price. However,聽聽
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given the shortage of the metal and the聽
growth in renewables and electric vehicles,聽聽
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this scenario seems highly unlikely to me. What聽
do you think? Let me know in the comments.
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Alright, so, first on my list of best copper聽
miners are Southern Copper and Freeport-McMoran,聽聽
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followed by Rio Tinto and BHP. In my opinion these聽
4 companies are the perfect way to bet on rising聽聽
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copper prices. Southern Copper is probably my聽
favourite because they own the largest copper聽聽
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reserves in the world! Then, Freeport-McMoran聽
is the main owner and operator behind 3 of the聽聽
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world's ten biggest copper mines in terms of聽
production with one of them being the largest聽聽
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copper mine by output in North America, Morenci聽
in Arizona. On the other hand, BHP is the majority聽聽
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owner and operator of the world's largest copper聽
mine by output, the Escondida mine in Chile.聽聽
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BHP own 57% of it and Rio Tinto owns 30%. BHP聽
also owns a third of the 8th biggest copper mine聽聽
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by output, Antamina. All of these companies also聽
produce zinc, silver, molybdenum as by-products聽聽
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so price increases in all of these will also聽
benefit them. Southern Copper is entirely focused聽聽
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on copper, Freeport-MncMoran also has some gold聽
mining operations, whereas Rio Tinto mines iron,聽聽
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bauxite, aluminium, diamonds and titanium, and聽
BHP mines iron, nickel, potash, uranium and聽聽
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also produces some natural gas, coal and oil.
So far, so good, but what is their valuation? Rio聽聽
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Tinto immediately comes up as the cheapest company聽
with a PE ratio of 14.7 followed by Southern聽聽
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Copper with 24.3 and BHP with 27.2, and finally聽
Freeport with 33. I think that the main reason聽聽
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behind Rio Tinto's cheap evaluation is that Rio聽
also has sizeable aluminum and iron operations,聽聽
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plus it has only been growing its revenue by only聽
4-5% a year, but that is likely to change once聽聽
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some of its new projects start production later聽
in 2021 and 2022. Now, copper is very popular聽聽
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right now so it seems that investors are pricing聽
it highly hence Southern Copper and Freeport have聽聽
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higher valuations. Looking at the forward PE,聽
we can see that Rio is again the cheapest with聽聽
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a FWD PE of 6.4 which is extremely cheap for the聽
industry and historically low for Rio itself.聽聽
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Freeport and BHP follow with FWD PE ratios of聽
14.3 for Freeport and 15.4 for BHP and finally we聽聽
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have SCCO with a FWD PE of 16 which is not that聽
bad as the company usually trades at 20 PE or聽聽
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higher. Also, if we look at the 5-year discounted聽
cash flow models for these companies on Finbox,聽聽
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we see that Rio Tinto has a potential upside聽
of 56%, Southern Copper has an upside of 34.5%,聽聽
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Freeport has an upside of 48% and BHP has an聽
upside of 38%! So, essentially, all of the 4聽聽
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companies seem to be priced relatively cheap聽
for what they are although Rio seems to be聽聽
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even more discounted than the rest.
Now, lets look at health. In terms of聽聽
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debt-to-equity, Rio is again the lowest with only聽
24%, followed by BHP with 37%, Freeport with 50%聽聽
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and finally Southern Copper with 86% which is聽
actually quite high. Despite the higher debt聽聽
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levels in Freeport and Southern Copper, all聽
four companies actually have enough cash to聽聽
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cover their current liabilities, meaning that聽
there is no real short-term risk there which is聽聽
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good to see. However, the low debt levels of Rio聽
Tinto make it very attractive in my opinion.
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Finally, let's look at the dividends. Miners聽
return money to shareholders through dividends,聽聽
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so this is a very important indicator. Can you聽
guess which one has the best dividend? Yeah,聽聽
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it's Rio Tinto again! They have a dividend yield聽
of 5.3% although the implied forward dividend聽聽
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yield is above 7%! BHP and Southern Copper follow聽
with a 4.2% dividend and finally we have Freeport聽聽
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with a 0.7% dividend. If you are after an聽
income portfolio, Rio Tinto seems perfect.聽聽
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Can they afford to pay their dividends though?聽
The answer? Yes! Their payout ratio is 64%聽聽
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which means that they are earning more聽
than enough to cover dividend payments.聽聽
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Southern Copper has a similar payout ratio of 62%聽
whereas BHP is perhaps paying an unsustainable聽聽
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dividend with an almost 90% payout ratio!聽
Freeport's has a payout ratio of just 6%,聽聽
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but that is simply because they are paying a tiny聽
dividend. In case you forgot what the payout ratio聽聽
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is, it is basically the amount of dividends that聽
the company pays divided by its net earnings.
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Alright, so, this is just my聽
opinion, but the way I look at it,聽聽
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Rio is the cheapest and most undervalued stock聽
which also pays the biggest dividend so it's聽聽
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the obvious pick. Southern Copper and Freeport聽
are a great choice if you want to bet on copper.聽聽
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BHP is okay as a backup choice to spread the risk.聽
Finally, if you are not convinced about any of聽聽
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these, but still want to get exposure to copper聽
miners, you can just get the Global X Copper聽聽
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Miners ETF ($COPX) or if you want to avoid miners聽
altogether and just get the metal, you can get the聽聽
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United States Copper Index Fund ($CPER).
Alright, I hope that was helpful. Copper has聽聽
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amazing potential over the next few years to聽
it's a good idea to keep an eye on the price.聽聽
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Apart from that, check some of my other stock聽
picks here. Please like, share and subscribe to聽聽
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help grow the channel. Thanks for watching聽
and I'll see you again in the next video!
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