It's been an excellent September so far for copper mining stocks, with Freeport-McMoRan(NYSE: FCX), First Quantum Minerals(OTC: FQVLF), Ivanhoe Mines(OTC: IVPAF), and HudBay Minerals(NYSE: HBM) all rising despite a recent correction. The moves highlight the volatile nature of commodity stocks and some reasons why putting money into copper miners is an attractive theme for investors.
Why copper mining stocks soared
The key factors behind the move come from near- and long-term catalysts:
- As ever, investors need to keep an eye on the price of copper because, rightly or wrongly, copper mining stocks tend to track it. The price of copper rose from $3.40 per pound at the start of the week to $3.56.
- The sector has seen a rise in proposed acquisitions recently, leading to "who's next?" speculation.
- The underlying supply/demand balance remains favorable to support the investment thesis around the sector.
These factors are interlinked. No company will launch a bid for another unless it believes the target has attractive assets, and for that, it has to think that the long-term supply/demand situation is favorable.
That's the thinking behind mining giant Rio Tinto's (NYSE: RIO) recent agreement to acquire the remaining 49% of shares it doesn't already own in Turquoise Hill(NYSE: TRQ) at a 67% premium. That deal followed from BHP Group's $5.8 billion failed bid to buy Australian copper and nickel miner Oz Minerals in August for a 32% premium. The takeover fever has caught on with the investment community, and stocks like Freeport, First Quantum, Ivanhoe Mines, and HudBay Minerals are possible targets (more on them in a moment).
Electric vehicles, renewable energy, electrification, and mining permits
The reasoning behind the bids is twofold: good old-fashioned supply and demand. Copper bulls see long-term demand driven by a combination of positive trends. Battery electric vehicles (EVs) require around 83 kilograms of copper compared to just 23 kilograms for internal combustion engines (ICE). Hybrid EVs use roughly 2 to 3 times the amount of copper as ICE cars.
Similarly, significantly more copper is needed in renewable energy for collection, storage, and distribution networks.
Lastly, the trend toward electrification in the economy (with industrial automation, smart buildings, wireless-enabled devices, EV charging networks, and the like) means copper has a significant role to play in the green economy. The metal is already widely used in the economy, but the marginal growth coming from EVs is likely to be the swing factor in pushing long-term demand higher.
Turning to the supply side, the increasing difficulty of acquiring mining permits and potential political instability in crucial copper-producing regions like South America (Chile and Peru in particular) and Africa (for example Sibanye Stillwaterhas suffered extensive strike action in South Africa this year) mean miners with productive assets are in demand.
Instead of going to increasingly costly moves to acquire and develop projects, it could make sense to pay a premium for smaller mining companies with assets. Moreover, it might make sense for the smaller miners to sell because the mining assets they own (as shareholders in the smaller companies) can receive investment from the new owners (BHP, Rio Tinto, and others) with deep pockets.
The potential targets
Buying a stock as a takeover target makes little sense unless you are happy holding the stock even if a bid doesn't come. That noted, it's fair to say Freeport is attractive enough in its own right. Still, with a market cap of $46 billion, it's tough to imagine anyone other than the largest miners moving in, and Rio Tinto is already engaged with Turquoise Hill. HudBay Minerals' collection of assets in Peru (already operating), Canada, and the U.S. make it a viable takeover target, as it has a sometimes fractious relationship with its largest shareholder, Waterton Global Resource Management (26%).
Given the multibillion-dollar bids from Rio Tinto and BHP, it would suggest that Ivanhoe Mines ($8.5 billion market cap) might also be in play. But Ivanhoe is 26% owned by China's CITIC Metal with China's Zijin Mining owning 13.7% (Ivanhoe has deals in place to buy copper output from its mines). As such, it's hard to see a bid for Ivanhoe coming from outside of China.
Canada's First Quantum Minerals is interesting because it has a poison-pill defense if any person or organization buys more than 20% of its shares; at that point, existing shareholders would get the right to purchase additional stock at a "substantial discount" to the market price, according to the company. That suggests any bid for the company would likely be a friendly one agreed upon in advance, or a substantive premium would need to be offered.
Bids or no bids, the takeover activity is a sign of confidence in the industry, and that's good news in itself.
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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
