It ain’t a big secret there isn’t a lot of value in the market right now, however we believe there still is a powerful catch up trade to be had in copper.

Copper Pricing Fundamentals

First let’s talk 101 copper pricing fundamentals. It’s critical to know what the cost of producing the last 10% of global copper, the 90th percentile cost. Currently the production cost of the 90th percentile is approximately $2.85/lb.

Copper Production Cost Curve

Why is this important? Historically copper has always traded above its 90th percentile cash cost of production. So any price below the 90th percentile has historically been a buy zone for the metal.

Copper Pricing vs. Production Cost

We’re currently sitting at $2.59/lb, having broken through the technical resistance of $2.50/lb –  there’s a clear runway here to $2.75/lbs.  Additionally, demand for copper in China (half of global demand) has picked up significantly since the easing of lockdown restrictions.

Small & Mid Cap Copper Stocks Offer Value

The big cap copper names like Freeport (NYSE: FCX) and Lundin Mining (TSX: LUN) have already moved significantly.

Looking at 1-year performance Freeport is nearly inline with the S&P 500 (+8% and 12% respectively), while the Global X Copper Miners ETF is down -9%. The ETF has more exposure to small and mid cap names, for example Sierra Metals  (TSX: SMT, NYSE: SMTS) is down -33% over the same period.

Copper Mining Stocks vs. S&P 500

A closer look also reveals a significant valuation disconnect. Freeport trades on a Price to Operating Cash Flow of 18x, Lundin Mining at 7x and Sierra Metals at 3x.  The small/mid cap copper space is one of the few remaining areas of genuine value left in the market.

Valuation of Copper Miners

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