Taking a Shine to Copper and Copperminers.
Many people are surprised at the size of the Copper industry. Of all the metals, including precious metals, only the iron ore and aluminum industries are bigger.
Using 2014 figures, Chile is the largest Copper mining country, with a 32% share of mined ore, followed by China (8%), Peru (8%), USA (7%) and Australia (6%). Of the countries producing refined copper, China was the world’s largest, with 27% of the world output, followed by Chile (16%), Japan (7%) and the USA and Russia (5% each). China is now the dominant player.
About 80% of all the Copper ever extracted is still in use today. Recycling contributes some 20%-30% of annual refined Copper production. Mining production and inventory drawdowns contribute the rest.
Total annual Copper mine production is about 22 million (metric) tonnes (Mt) or roughly 50 billion pounds. At the current price of about $3.00 per pound, Copper miners are producing about $150 billion in economic value annually. Compare that to the Gold industry where annual production from mining is valued roughly at $135 billion from just 3,000 tonnes. Of course, the price of Gold is about $1,300 per oz.
Copper has been mined for 10,000 years but half the total world output has occurred in the past 25 years. There are probably only 35 to 45 years of reserves remaining if studies by the U.S. Geological Survey are accurate. In 2013, the USGS estimated world resources to be 3.1 billion tonnes of which 690 Mt were defined as reserves.
Like they do about peak gold and peak oil, there are academics who write papers about peak copper. But do we really want to waste our valuable time thinking about it?
Of the ten largest copper mines in the world, six are in Chile, two in Peru, one in Mexico and one in Indonesia. Chile produces almost one-third of total global production.
Of the Copper miners, BHP Billiton Ltd (BHP) owns about 57.5% and operates Escondida in Chile, the world’s largest Copper mine, with reserves of close to 30 million Mt and annual production of about 1.1 million Mt. Southern Copper Corp (SCCO), a subsidiary of Grupo Mexico, owns and operates two of the five biggest copper mines. Chile’s state-owned Codelco, Anglo American (AAL.L) and Freeport-McMoRan (FCX) are also major owner-operators.
Copper is a consumable and very much a requirement for the continuously growing world population and global economy. The metal is easy to work with, an efficient conductor of electricity and of heat, and is corrosion resistant.
Refined copper is used 36% in building construction, 25% in equipment, 15% for industrial use, 14% in transport and 10% in infrastructure, whereas for Gold, 85% of mined production goes to Central Banks and for bars and coins, all of which is hoarded.
Copper market prices are quite volatile. After reaching a peak early in 1Q2011 at ~$4.50/lb, the Copper dropped through a Bear market until it reached ~$2.00/lb in 3Q2016. The Copper Bull began October 2016, rising about +50% in price in the past 12 months.
Trends and cycles in the price of Copper have two main drivers: (i) world population growth and the global economy, and (ii) industry inventory levels whether they be viewed as a temporary shortage or glut, which are determined by changes in mine production and recycling of scrap.
This week, the Bureau of Economic Analysis (BEA) of the U.S. Department of Commerce reported that the US economy was growing at a +3.06% annual rate, up from +1.82% from the prior quarter. Similar bullish data is being reported for Germany, Japan, China and India. The rally in Copper prices over the past 12 months has been an accurate indicator.
Despite an aligned approach to monetary contraction by the world’s leading central banks, we believe that inter-bank lending rates are still quite low and well below the level they will likely reach over the next two years before the global economy is unduly impacted. In other words, we believe the price of Copper will remain in its present long-cycle uptrend for at least another year.
Day to day, traders in the capital markets apply varying degrees of interpretation of the macroeconomic data due to their being highly influenced by the financial media. However, from our perspective, we believe that if one invests in the most fundamentally attractive companies in the industry and holds long positions during bullish price trends of the Copper metal, we can accomplish several objectives:
(1) One’s overall portfolio will benefit through low correlation to traditional asset classes
(2) The investment will achieve higher risk-adjusted returns than passive buy and hold strategies in the major market indexes, and
(3) The benchmark S&P North American Natural Resources Index will be beaten.
Our Natural Resources Strategy is an attempt to meet these objectives through a portfolio of 12 to 20 fundamentally attractive companies with market entry and exit timing based on our proprietary trend and cycle studies.
Of the Copperminers we continuously monitor, there are three we are likely to hold as investments:
(1) BHP Billiton Ltd (BHP)
(2) Freeport-McMoRan Copper & Gold Inc (FCX)
(3) HudBay Minerals Inc (HBM)
Because of the size of the portfolio, being only 12 to 20 stocks in total, we presently hold a position in only one of these. A month ago, we started buying HudBay (HBM) on the NYSE at US$7.50, added some at US$7.65 and more at US$7.10. Our cost base is US$7.51, which is the same price at the time this report was written. This month, we also bought HBM on the Toronto Exchange at an average cost of C$8.75, which is now trading at C$9.35.
From its website, the Company describes itself as follows:
Hudbay is an integrated mining company primarily producing copper concentrate (containing copper, gold and silver) and zinc metal. With assets in North and South America, the company is focused on the discovery, production and marketing of base and precious metals. Directly and through its subsidiaries, Hudbay owns four poly-metallic mines, four ore concentrators and a zinc production facility in northern Manitoba and Saskatchewan (Canada) and Cusco (Peru), and a copper project in Arizona (United States). The company’s growth strategy is focused on the exploration and development of properties it already controls, as well as other mineral assets it may acquire that fit its strategic criteria. Hudbay’s vision is to become a top-tier operator of long-life, low-cost mines in the Americas.
Review of HudBay Minerals Inc (NYSE and TSX: HBM)
Fundamentally, while Finances and Yield are not terrific in the case of HudBay (HBM), the stock compares extremely favorably to BHP Billiton (BHP), Freeport-McMoRan (FCX) and Southern Copper (SCCO), which are larger Copperminers. This is the reason we choose it for portfolios ahead of the others in its peer group.
Briefly there are 15 fundamental ranking criteria we reviewed using data at the close on September 28 (Thursday). The scores represent percentile rankings over thousands of companies in the 4-Traders.com database.
In the tables below, for interest sake we added data for the largest Goldminer ABX (Barrick) and largest Gold royalty streaming company FNV (Franco-Nevada). The Goldminer data was updated from the results we showed in our September 8 report.
|7 days EPS revision||93||46||88||50||28||54|
|4 months EPS revision||93||48||39||44||21||60|
|1 year EPS revision||88||60||79||65||77||89|
|4 months Rev revision||58||51||67||74||44||77|
|1 year Revenue revision||30||50||69||70||73||80|
Fundamental Rankings (See table above for Copperminers BHP, FCX, SCCO and HBM):
1.Revenue Growth, which is based on the evolution of the turnover of the company between the last year and the three coming years according to consensus estimates. The higher the growth is (from a relative viewpoint), the better the rating is. The goal is to rank companies according to estimated sales and to identify companies with the highest growth.
1. Winners: SCCO and HBM
2. Losers: FCX and BHP rank poorly
2.Valuation, which is based on the ratio between enterprise value and its turnover for the current fiscal year and the next one. The lower the valuation is, the better the rating is. The goal is to rank companies according to valuation and to identify companies with the lowest valuation.
1. Winners: FCX and HBM
2. Losers: SCCO
3.Finances, which is based on the evolution of the net debt of the company (debt or cash) and its EBITDA, compared to its revenue. The higher the cash is, the better the rating is. The goal is to rank companies according to financial situation and to identify companies with the highest growth. The goal is to rank companies according to the quality of their financial situation.
1. Winners: BHP
2. Losers: SCCO and FCX
4.Profitability, which is based on net margin of the company for the current year and the next one according to consensus estimates. The higher the ratio is, the better the rating is. The goal is to rank companies according to the “Net income/revenue” ratio to identify those which have a high payoff.
1. Winners: SCCO, BHP and HBM all have very high rankings
2. Losers: FCX is lowest ranked, but is actually still quite good
5.Earnings Quality, which is based on quality of past earnings released by the company compared to analysts’ estimates. The better earnings release is, the higher the rating is. The companies closest to the consensus will have an average score. The goal is to identify companies that publish regularly above consensus.
1. Winners: SCCO, BHP and HBM
2. Losers: FCX although the score is fairly high in a multi-thousand stock universe
6.Business Predictability, which is based on the dispersion of analysts’ estimates on the evolution of the company business in the coming years (range estimates). The more estimates are concentrated, the more the rating is high. The goal is to rank companies according to the predictability of their business and identify companies whose business is highly predictable.
1. Winners: SCCO although the score is poor
2. Losers: All are poor, but FCX is bad
7.Price Earnings Ratio, which compared the company’s current share price to its per-share earnings for the current fiscal year and the next one. The lower the PER is, the better the rating is. The goal is to rank companies according to their earnings multiples and identify those which are cheap.
1. Winners: HBM, BHP and FCX
2. Losers: SCCO
8.Upside Price Potential, which is based on the average target price fixed by the consensus from Thomson Reuters. The higher the target price is, the better the rating is. The goal is to identify companies that have, according to analysts, the strongest upside potential.
1. Winners: HBM has a very high ranking
2. Losers: SCCO ranked very low
9.Yield, which is based on the dividend relative to its share price. The higher the dividend yield is, the better the rating is. The goal is to identify companies that can supply a significant dividend return to their shareholders.
1. Winners: BHP offers by far the best yield
2. Losers: The rest are poor, but FCX is bad
10. Consensus, which is based on analyst recommendations. It provides an indication of the position taken by most analysts polled by Thomson Reuters. The goal is to identify companies that benefit from the maximum of buy (or sell) recommendations.
1. Winners: By far the best is HBM
2. Losers: SCCO ranked very low
11. EPS revisions (one week), which is based on the evolution of EPS (earnings per share) revisions of the company for the current fiscal year and the next one. During the last week, more EPS estimates are revised upward (from a relative point of view), the more rating is high. The goal is to rank companies according to analyst estimates and to identify companies with the best EPS estimates.
1. Winners: BHP ranked very high
2. Losers: SCCO was low
12. EPS revisions (four months), which is based on the evolution of EPS (earnings per share) revisions of the company for the current fiscal year and the next one. During the last four months, more EPS estimates are revised upward (from a relative point of view), the more rating is high. The goal is to rank companies according to analyst estimates and to identify companies with the best EPS estimates. The difference is that the period of observation is based on fourth month instead of one week.
1. Winners: BHP was the best
2. Losers: SCCO was the worst
13. EPS revisions (one year), which is based on the evolution of EPS (earnings per share) revisions of the company for the current fiscal year and the next one. The more EPS estimates are revised upward (from a relative point of view), the more rating is high. The goal is to rank companies according to analyst estimates and to identify companies with the best EPS estimates. The difference is that the period is three times as long as EPS revisions (four months).
1. Winners: HBM was very highly ranked but BHP and SCCO were also high
2. Losers: none, which reflects the improving Copper price in the past 12 months
14. Revenue revisions (four months), which is based on the evolution of revenue revisions of the company for the current fiscal year and the next one. The more revenue estimates are revised upward (from a relative point of view), the more rating is high. The goal is to rank companies according to analyst estimates and to identify companies with the best revenue estimates.
1. Winners: HBM followed by FCX
2. Losers: SCCO was a tad below average
15. Revenue revisions (one year), which is based on the evolution of revenue revisions of the company for the current fiscal year and the next one. The more revenue estimates are revised upward (from a relative point of view), the more rating is high. The goal is to rank companies according to analyst estimates and to identify companies with the best revenue estimates. The difference is that the period is three times as long as Revenue revisions (four months).
1. Winners: HBM was very good, but the others ranked well above average
2. Losers: None
A closer look shows that, for market cap, BHP ($107.8 Billion), SCCO ($31.0 B) and FCX ($20.9 B) are much larger companies than HBM ($1.8 B). But with rapidly improving fundamentals, HBM’s share price is growing fastest, up +104% in 12 months vs +48.5%, +32.2% and +18.7% for SCCO, FCX and BHP respectively. Volatility is also much higher. Interestingly, the financial analysts who cover these companies give a rating of 1.5 (excellent) to HBM vs 1.8 to BHP, 2.8 to FCX and 3.4 (bad) to SCCO. Short sellers are only large in SCCO. HBM’s Forward P/E is under 10 and its Price to Book is just 0.99. All the others are significantly higher.
From the 2Q2017 Financial Statements, the Company reported an All-In Sustaining Cash Cost (AISC) for Copper of US$1.49/lb.
On July 14, the Company managed to refinance their credit facilities with a two-year extension to July 14, 2021 at a considerable reduction in interest charges. A small semi-annual dividend of C$0.01 per share was declared.
This week, HudBay closed the sale of 24 million common shares at C$10.10 for gross proceeds of C$242,400,000. After the bought-deal offering was announced after the market close on September 7, the stock plunged -13% the next day as investors were worried about dilution.
Motley Fool then reported: “While it ended 2Q2017 with $125 million in cash, the company has three brownfield expansion projects — Lalor zinc, Lalor gold, and Pampacancha — and the high-potential Rosemont project in Arizona that are quickly advancing and require investment. The company has steadily improved its performance and balance sheet in the last four quarters, so announcing a rather large share offering now is smart from management’s perspective. It allows the company to take advantage of a rising stock price, and therefore raise more funding from selling fewer shares. Of course, it still results in dilution for shareholders. But if the extra cash enables increased production output and operating performance for the foreseeable future, then it could be a trade worth making.”
We have confidence in management and the board of directors of HudBay, seeing them as straight-forward, down to earth people who capably perform. We also have confidence for the continuing good prospects for the Copper market. The results are apparent in our portfolio.
Although we held a position in HBM shortly before this month’s stock offering, following it we bought more shares. Already committed to the stock, we bought more on weakness at C$8.75 and US$7.10. HBM was subsequently priced as of Sept 28 (Thursday close) at C$9.35 and US$7.50, so these trades were timely.
With the Copper price opening higher on Friday morning at US$2.97, the HBM share prices may possibly regain the C$10 level (~US$8.00) next week and move significantly higher from there.
As we see it, HudBay is between a rock (we like) and a soft place. We like the Company and we like the stock, a good combination to have in one’s portfolio.
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