Despite a gradually improving economy back home, prices of many basic materials commodities are depressed. This is because metal markets, for example, are interlinked and price movements depend on net changes in demand. Since European economies are faced with prospects of a full blown recession while China is merely a shadow of its past, a slowly improving US economy is too weak a pull for metal prices. One of these depressed metals is Copper which has hit its lowest level in eight months as unsold inventories have surged to their highest levels in nearly a decade. Copper demand is a broad indicator of underlying world economic growth, particularly in industrial production, transportation and construction, which together account for nearly 57% of the metal’s global demand. As a result of lower prices, copper stocks such as Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX), Augusta Resource Corp. (NYSEAMEX:AZC) (TSE:AZC), and Southern Copper Corp (NYSE:SCCO) have retracted to lower levels. Is this a good time to accumulate these stocks? Here is a closer look:
Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) presents a curious case of undervaluation. The company is a miner of gold and molybdenum apart from copper and has assets in Indonesia, North and South America, and Congo. After reporting disappointing fourth quarter and full year results in February, the stock has come under pressure. The company said its full year revenues tanked 14.1%, but the erosion in profits was steeper as its earnings lost one third to end the year with $3.04 billion. What happened after the results can be summed up as excessive punishment. Over the last 3 months, the stock lost 8% and currently trades at a price earnings ratio of 10.2. The trend of shrinking sales and profits is not likely to continue in the coming quarters as analysts expect prices to pick up. FBR Capital recently initiated coverage on the stock with an outperform rating and a target price of $41. This reflects an upside of 28% from current levels. UBS also has a buy rating on the stock and has a price expectation of $39. With debt forming just 20% in equity, and a dividend yield of 3.8%, the stock looks attractively priced.
On April 9th 2021, Bruce Greenwald, the founding director of the Heilbrunn Center for Graham and Dodd Investing at Columbia Business School, sat down for a Fireside Chat with Li Lu, the founder and chairman of Himalaya Capital as part of the 13th Columbia China Business Conference. Q1 2021 hedge fund letters, conferences and more Read More
Augusta Resource Corp. (NYSEAMEX:AZC) (TSE:AZC) is another player in this space. The company is a pure copper play, although its Rosemont copper property located in Arizona produces appreciable amounts of molybdenum and silver by-products. It has been making some encouraging announcements lately but the fact that its fortunes are completely dependent on a single property may make it a risky proposition in the event of any negative development. Unlike Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX), Augusta Resource is a loss making concern. The stock has been moving in a tight range of $2.2 – $2.9 during the last couple of quarters and is currently available at $2.6. It has been rated a “speculative sector outperform” by investment analysts at CIBC indicating at least a 100% potential upside to $5.5. This small cap stock has a high beta of 2.2 which indicates it will be one of the first ones to move up when the recovery starts in copper stocks.
Arizona based Southern Copper Corp (NYSE:SCCO) has been making lower highs and lower bottoms indicating that the slide we have seen in this stock so far in the quarter is likely to continue for some more time. Its financials, nevertheless, indicate that the company is getting ahead of the game in controlling costs. In the fourth quarter, its revenues slid marginally to $1.6 billion; however, profits did not witness a major impact and stood at $531 million. This was a much better performance when seen in conjunction with the figures reported in earlier quarters which have caused the full-year profits to drop 17%. It is currently available at a price earnings ratio of 15.7 and offers a dividend yield of 2.6%.
The downward pressure on these stocks is likely to continue as long as copper prices remain depressed. At first signs of a turnaround, Augusta Resource Corp. (NYSEAMEX:AZC) (TSE:AZC) may offer market beating returns while Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) and Southern Copper Corp (NYSE:SCCO) will see steady gains.