January 28, 2021: Future Returns: Copper Plays A Leading Role In The Green Economy - Barron’s
By Sarah Max
Mining and mineral stocks don’t exactly scream sustainability, but a growing emphasis on renewable energy, sustainable infrastructure, and green transportation is driving incremental demand for certain commodities, particularly copper.
“Over the next 10, 20, 30 years, a lot of capital is going to be allocated toward reaching zero-emissions targets that countries are setting globally,” says Nick Niziolek, co-CIO and head of international and global strategies at Calamos Investments.
While he and his colleagues think these initiatives will require a wide range of raw materials, copper is key because it is a highly-efficient conduit. Renewable energy generation is up to five times more copper intensive than conventional power because it is more decentralized and requires multiple, smaller units to be connected to the main grid, according to Calamos research. A single onshore wind turbine requires more than four tons of copper.
Meanwhile, the growth in electric vehicles is also giving copper a lift. The typical EV needs four times more than a comparable internal combustion vehicle, Calamos notes, while copper is also needed for EV charging stations.
A Cyclical Play Gets a Secular Boost
Copper, like most commodities, has been a cyclical investment whose demand ebbs and flows with economic cycles. Traditionally, roughly half of all copper demand has come from new building construction and infrastructure, Niziolek says, and China has been the single biggest market by far. With many global economies in or entering recovery phases, cyclical demand is on the upswing.
Green initiatives around the world offer a secular tailwind as well. The European Green Deal, President-elect Joe Biden’s ambitious climate plan, and China’s target of carbon neutral by 2060 all point to increasing incremental demand for copper.
Supply Constraints Add to the Appeal
At the same time copper demand is on the rise, supply has been constrained.
“We think copper is a great commodity because its supply hasn’t been developed in a significant way in the last 15 years,” Niziolek says, adding that global copper supply over the last three years has grown less than 1% per year, while new copper mines take years to develop. “It’s going to take a while for that supply to catch up, and longer term you have those tailwinds that aren’t going to abate.”
These dynamics haven’t been lost on investors, who have bid up the price of the commodity. Benchmark copper on the London Metal Exchange (LME) increased 26% in 2020 and recently reached an eight-year high of just over $8,000 per ton; it’s yet to surpass its all-time high of nearly $10,000 in 2011.
Mining Stocks Still Have Upside
At Calamos, Niziolek and his team favor publicly traded mining companies.
“These aren’t risk-free investments, but the flip side is there is a benefit of having exposure to a well-run operation,” he says. “If you can invest in high-quality miners that are able to develop new resources, have a growth pipeline in place, and then can benefit from a fixed-cost structure and rising commodity prices, we think that’s a tremendous opportunity.”
Although mining stocks have in many cases quadrupled since their March 2020 lows, many names are still trading below their previous highs, and at a time when fundamentals are improving. “We still think that there’s at least 20% to 30% upside,” says Niziolek, who owns mining concerns with significant exposure to copper in the Calamos Evolving World Growth (CNWIX) fund.
Take Freeport-McMoRan, a Phoenix-based company whose business is roughly 70% copper, 20% gold, and 10% other, according to Niziolek. The stock plummeted to $7 a share during the selloff last spring and has since recovered to a recent $30. But it is still about half what it was at previous highs of around $60 in early 2008 and 2011.
Canada-based First Quantum Minerals (FQVLF) also derives most of its revenue from copper. “They have a flagship mine in Panama that’s been successfully ramping up operations,” Niziolek says. Its stock is also trading below its previous highs.
A third example is Southern Copper Corp. , which is also based in Phoenix and focused on copper. “They’re one of the lowest-cost providers, and there is also the opportunity for them to de-leverage,” he says, noting that many mining concerns increased their leverage to manage the cyclical downturn in demand.
Now, many are taking advantage of increasing demand to pay down debt––which could add additional polish to their stock prices.