Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in FCX over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Housing has finally come off its bottom and may be entering a long-term bull market. A strong indication of this reality is that the homebuilding stocks have been among the market leaders in 2012, as the SPDR S&P 500 Homebuilder ETF (XHB) is up 45.4% year-to-date. While homebuilding stocks including XHB, which holds a basket of such home-building equities, is certainly a strong buy on a confirmed housing rebound, owning copper is another lesser known but potentially highly rewarding pin action play to consider. If housing is indeed picking up again, it may serve as another catalyst for the price of copper because the home and office building construction sectors use approximately 40% of the copper in the United States, with direct residential construction constituting approximately two-thirds of the market. There are approximately 200 pounds of copper electrical wire in the average new home constructed in 2011. This figure doesn't even include the amount of copper wiring that goes into additional home appliances, plumbing and air-conditioning systems.
If housing has bottomed and new home construction continues then copper should have a tailwind leading to prices continuing to rise as the housing and homebuilding market improves. There is some evidence that things are improving. United States homebuilder confidence was up sharply in July, and hit a five-year high in August. In September it ticked even higher to hit the best reading since June 2006 and rose even further in October. Coupled with increasing property sales in China, a rapidly growing country for housing, I think we could see increased copper demand in the next few quarters. I recommend the following methods right now to play copper: Futures contracts, copper ETFs/ETNs, and the mining stocks.
Futures contracts: Experienced investors who are bullish directly on the trading price of copper could consider getting long on copper futures contract. A potential way to get exposure to these futures is via the CME Group's Commodity Exchange (COMEX) under the symbol HG. This is a direct method of being exposed to copper prices, but it comes with substantial risk. A futures contract is an agreement to take physical delivery of 25,000 pounds of copper, which is priced per pound. The December 2012 copper contract closed Friday (11/16/12) at $3.45 a pound.
Copper ETN: iPath Dow Jones-UBS Total Return ETN (JJC): The JJC is an ETN that gives investors exposure to copper futures without the complexity of directly buying futures contracts that were presented above. Without delving too far into the differences, take note that an ETN is different than an ETF. An ETF contains actual securities or commodities whereas an ETN gives exposure to contracts. More information about the differences between an ETF and ETN can be found here. JJC gives investors a cash payment at maturity based on the performance of the Dow Jones-UBS Copper Total Return Sub-Index. With $118 million in assets, JJC is trading around $45.94 and has an expense ratio of 0.75. JJC has a 52-week trading range of $41.65 to $51.41.
Mining stocks: A good way to gain exposure to precious metals as a whole, but to copper specifically is through the miners. I have previously recommended gold miners as the best alternative to playing the gold ETF (GLD), and the top picks in that sector have been outperforming the GLD in the last three months. Further, I believe that copper miners represent better investments than playing the metal directly, as they often have cross exposure to other metals, as well as generally pay a nice dividend. If you believe in a rebound in housing and ultimately copper prices, then it's hard not to like my three favorite plays in the mining space, BHP Billiton (BHP), Freeport-McMoran Copper & Gold (FCX), and Southern Copper (SCCO), right now.
BHP engages in the exploration, development, and production of oil and gas; mining and refining of bauxite into alumina, and smelting of alumina into aluminum metal; and mining of copper, silver, lead, zinc, molybdenum, uranium, gold, diamonds, and titanium minerals, as well as development of potash deposits. It also involves in the mining and production of nickel products, manganese ore, and manganese metal and alloys, as well as in the mining of iron ore, metallurgical coal, and thermal coal. BHP Billiton Limited sells its copper, lead, and zinc concentrates, and alumina to smelters; copper cathodes to wire rod mills, brass mills, and casting plants; uranium oxide to electricity generating utilities; rough diamonds to diamond buyers and diamond manufacturers; nickel products to stainless steel, specialty alloy, foundry, chemicals, and refractory material industries; metallurgical coal to steel producers; and energy coal to power stations, power generators, and industrial users.
The stock currently trades at $72.66 with an 12.6 p/e multiple. It has a 52-week trading range of $59.87-$82.23 and on average 2.2 million shares exchange hands daily. BHP pays a dividend of 3.1% annually at current levels.
SCCO is also a major copper miner. It engages in mining, exploring, producing, smelting, and refining copper and other minerals in Peru, Mexico, and Chile. It is involved in the mining, milling, and flotation of copper ore to produce copper and molybdenum concentrates; smelting of copper concentrates to produce anode copper; and refining of anode copper to produce copper cathodes, as well as refined silver. The company operates Toquepala and Cuajone mines in the Andes Mountains located to the southeast of the city of Lima, Peru, as well as a smelter and refinery in the coastal city of Ilo, Peru. It also operates La Caridad and Buenavista copper mines, and smelting and refining plants in Mexico. In addition, the company operates five underground mines that produce zinc, copper, lead, silver, and gold; a coal mine which produces coal and coke; and a zinc refinery. It has 145,064 hectares of mineral rights in Peru; 176,250 hectares of exploration concessions in Mexico; 1,068 hectares of exploration concessions in Argentina; 35,958 hectares exploration concessions in Chile; and 2,544 hectares of exploration concessions in Ecuador. The stock currently trades at $37.76 with a 16.5 multiple. It has a 52-week trading range of $27.72-$39.44 and on average 2.0 million shares exchange hands daily. SCCO pays a dividend of 9.8% annually (based on their last quarterly dividend of $2.75 which does fluctuate quarter to quarter).
FCX is a bellwether in the sector. It engages in the exploration, mining, and production of mineral resources. The company primarily explores for copper, gold, molybdenum, cobalt hydroxide, silver, and other metals, such as rhenium and magnetite. It holds interests in various mines located in the Grasberg minerals district in Indonesia; Morenci minerals district in North America; South America; and Tenke Fungurume minerals district in the Democratic Republic of Congo. As of December 31, 2011, the company's consolidated recoverable proven and probable reserves included 119.7 billion pounds of copper, 33.9 million ounces of gold, 3.42 billion pounds of molybdenum, 330.3 million ounces of silver, and 0.86 billion pounds of cobalt.
The stock has been under pressure of late as it has recently announced purchasing two energy companies for $9 billion dollars. "The oil and gas assets being acquired possess the asset quality characteristics that we seek in our mining business - large scale assets with long lives, low cost and geologic potential to support growth through exploration and development," said Richard C. Adkerson, CEO of FCX regarding the acquisitions.
The stock currently trades at $30.81 with a 10 multiple. It has a 52-week trading range of $30.54-$48.96 and on average 17.0 million shares exchange hands daily. FCX pays a dividend of 4.1% annually.
Global X Copper Miners ETF (COPX): For those who do not want to invest in a single copper miner the COPX offers exposure to the entire sector. This is an ETF that tracks the Solactive Global Copper Miners Index, and its holdings include global firms from across the international spectrum. This international fund has roughly $26 million in assets, currently is trading at $12.95 and has an expense ratio of 0.65. The fund has a 52-week trading range of $10.34 to $15.82.
Bottom line: There is strong evidence that housing has bottomed. Homebuilder confidence is at a six-year high. Besides investing in the homebuilding stocks, one not-so-obvious pin action approach to a housing recovery is to consider investing in copper and copper stocks. This can be done through futures, an ETN such as JJC, an ETF such as COPX, or my favorite approach, through the mining stocks. In my opinion BHP, SCCO and FCX represent the three best plays in the copper mining space.