It is highly likely that I will own a copper mining stock within the next 24 months. I have many thoughts about how, when and why this might happen so let’s go through a few.
There is a one word answer as to why I want to own copper for the long term – decarbonization. In a May 2022 column, I cited Citi research estimating that an additional 5.5 billion tonnes of strategic metals, including copper, will be needed before 2050 to meet net-zero emissions targets. For context, there are 20 million tonnes of copper produced annually.
The bullish outlook for copper has not been apparent in recent market activity. The commodity price is down about 27 per cent from the March 2022 high, taking the miners with it. Depressed prices make it tempting to just buy a related stock now. After all, we’ve been told a million times not to try and time the market.
The problem there is highlighted by a Citi report by mining analyst Ephrem Ravi with the blunt and disquieting title Beware the false dawn in metals demand. Mr. Ravi believes that an upcoming recession in Europe will depress copper demand and prices.
Europe is not the only region where economic growth – the primary driver of industrial metals demand – is uncertain. The Composite Leading Indicator for all OECD economies is falling rapidly. In addition, GDP growth estimates for China in 2022, hit by COVID lockdowns and financial stress in the property sector, have dropped from 5.5 per cent in late 2021 to 3.5 per cent now.
Citi’s copper research and the growth outlook imply that patience is the wise course where mining stocks are concerned.
There’s another recent report, however, from Scotiabank analyst Orest Wowkodaw that suggests the opposite.
Mr. Wowkodaw believes that a combination of healthy balance sheets, rising costs for developing new mines, and depressed stock prices will lead to a new cycle of merger and acquisition activity in the mining sector.
The analyst lists two copper stocks as attractive potential targets – Hudbay Minerals Inc. and First Quantum Minerals Ltd. – and they would be among my preferred investment choices for copper exposure. I would, of course, be highly annoyed if one of my favoured options was taken out at a big premium to market value before I purchased their shares while waiting for lower copper prices.
This messy pre-investment thought process is not unusual for me. I tend to start with a longer-term idea, in this case decarbonization’s positive effects on copper demand, then absorb all the credible related information as it rolls in. If an attractive entry point presents itself, great, I’ll jump at it. If not, then I’ll just move on to any of the other ideas I’m considering.
-- Scott Barlow, Globe and Mail market strategist
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The Rundown
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Ask Globe Investor
Question: I feel my investment firm is just after my monthly fees. I retired in October, 2021. I asked my adviser to pay me $800 monthly from my RRSP. He’s saying to create a RRIF instead and leave it invested. I do not need the $800 to live. I was going to move it to a fee-free investment. I fear they are just trying to keep my money so I will continue to pay their fees. Should I be taking withdrawals to the lowest tax bracket rate? I have room to take $10,000 per year. My hope is to invest a portion of that income into GICs and reduce fees.
Answer: Based on what you say, I assume you have a fee-based account so, yes, it would be in your adviser’s interest to keep you as a client. Whether it’s in your own interest depends on how well your investments are performing.
GIC rates have moved up to as high as 5 per cent in a few places. It remains to be seen how much higher they’ll go.
Here is what I suggest. Ask for a review of your account for the past five years and request the broker provide an average annual compound rate of return, after fees. If that beats what you’d get from a GIC, the money you’re paying is well spent. If it doesn’t, proceed with your withdrawal and GIC investment plan.
--Gordon Pape
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Navigating the energy shock and other world market themes for the week ahead
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Compiled by Globe Investor Staff