These copper stocks, which are producers, stand apart as the biggest beneficiaries
Motley Fool | December 19, 2016: The spot price for copper had been in the doldrums for years before recently rebounding to a 16-month high as investors bet that global manufacturing and infrastructure spending will increase. That is great news for the largest copper companies, which will benefit from rebounding prices. But while the rising tide of higher copper prices will lift all miners, successful investing in copper stocks takes more than just blindly choosing a company based on copper production.
Despite the recent surge in copper prices, the consensus view in the industry is that current copper prices are insufficient to meet future demand because they are not high enough to incentivize producers to invest in enough new projects to offset declining output. As a result, analysts at research firm Wood Mackenzie believe that production from existing mines will fall by 4 million tons through 2025. That is a substantial amount of copper. For perspective, the world’s top 10 mines only produce 5.5 million tons of copper per year.
To reverse this trend, Wood Mackenzie believes that copper needs to average about $3.30 per pound to incentivize producers to increase output. However, given that copper is currently around $2.50 per pound, it means prices need to go meaningfully higher to fuel new investments. That outlook will certainly benefit the world’s top copper companies.
Mexican-based Southern Copper is currently the largest holder of copper reserves and has the longest mine life at 94 years. More importantly, it has the lowest costs in the sector at just $0.91 per pound after factoring in by-product credits. Also, while Southern Copper is currently only the fifth-largest copper producer, it has several growth projects underway that will boost its output by more than 50% through 2020. In addition to that, it has several large potential projects in the pipeline to expand production even more, including two world-class greenfield projects. Investors looking for a low-cost, high-growth copper company need to look no further than Southern Copper.
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