Copper is the third-most-used metal in the world behind iron ore and aluminum. In 2018, the global economy used 23.6 million tons to build electrical systems, automobiles, machinery, and a whole host of other things.
However, as important as copper has been to the global economy in the past, it's even more vital to the future. That's due not only to the expected continued expansion of the global economy but also to the metal's importance in the renewable energy sector. As a result, forecasters at the McKinsey Global Institute project that copper consumption will surge 43% by 2035.
This outlook suggests that copper-producing companies will be able to expand their output and profitability at a healthy pace in the coming years, so investors will want to consider adding a copper stock to their portfolios. Here's an in-depth look at those companies best positioned to capture the sector's upside potential.
Image source: Getty Images.
Digging into the best copper stocks
While several large mining companies produce copper, many of them do so as a by-product of their primary target; copper deposits are often found in association with other metals like gold or nickel. That's why investors need to dig deeply into mining companies' portfolios and growth prospects to determine which have the most leverage to the copper sector's growth potential. The following four stand out as the best positioned to capture this opportunity:
|Copper Producer||Copper Growth Potential|
|BHP Group (NYSE: BHP)||The Spence Growth Option is underway, while Resolution Copper and an expansion of Olympic Dam are in development.|
|Freeport-McMoRan (NYSE: FCX)||Copper sales projected to grow from 3.3 billion pounds in 2019 to 4.2 billion by 2021.|
|Rio Tinto (NYSE: RIO)||Oyu Tolgoi underground mine under construction and Resolution Copper in development.|
|Southern Copper (NYSE: SCCO)||Copper production heading toward 1,800 kilotons by 2026 from 884 kilotons in 2018.|
Data source: Mining company investor presentations.
Here's a closer look at the copper growth prospects of each of these mining companies.
BHP Group is one of the world's largest global resources companies. In addition to mining copper, it also produces iron ore, coal, nickel, zinc, oil, and gas. It operates mines in Australia as well as North and South America.
BHP's copper business consists of the following assets:
- The wholly owned Olympic Dam mine in Australia, which is one of the world's largest deposits of copper, gold, and uranium. It also holds a significant amount of silver.
- A 57.5% interest in the Escondida mine in Chile, which is the world's top copper producer. The mine also produces gold and silver.
- Pampa Norte in Chile, which consists of two wholly owned operations: Spence and Cerro Colorado.
- A 33.75% stake in the Antamina mine in Peru, which primarily produces copper and zinc. It also produces some molybdenum, lead/bismuth concentrate, and small amounts of silver.
- A 45% interest in Resolution Copper, which is a proposed large-scale copper mine in the U.S.
In 2018, BHP produced 1,753 kilotons of copper (about 3.9 billion pounds) from its various mines, which made it a top-five global producer. The bulk of that output came from its majority stake in Escondida, where it produced 1,213 kilotons of copper.
While BHP is one of the world's largest copper producers, it makes most of its money on iron ore. In 2018, that metal supplied it with 39% of its underlying EBITDA. Copper was second at 28%, followed by coal at 19% and oil and gas at 14%.
The company, however, has meaningful upside to the growing copper market. One of the biggest drivers in the near term is the company's approval of the Spence Growth Option, which is a $2.46 billion project to increase the production of its Spence mine in Chile. The project will boost that mine's annual output by 185 kilotons starting in 2021.
Meanwhile, BHP has meaningful longer-term copper growth prospects. It's considering investing up to $2.5 billion to expand its Olympic Dam mine. While the project would take five years to develop, it could increase its annual production capacity by 240 to 300 kilotons. In addition to that, the company could invest up to $3 billion in the Resolution Copper project, which holds one of the world's most significant undeveloped copper deposits. The company also has some promising exploration prospects in Ecuador and Australia that it could develop. Those projects and prospects provide BHP with the resource potential needed to capture a large share of the growing copper market.
While BHP has lots of upside to the copper market, it's not without its share of risks. Aside from the typical headwinds facing mining companies such as lower prices, BHP has some notable company-specific issues that investors should watch. One of the biggest is that the company isn't focused solely on copper. While BHP's diversification has some benefits, such as helping reduce its overall risk profile, it limits investors' upside to the copper sector. It also exposes the company to other issues.
For example, BHP is a 50-50 joint venture partner with iron ore giant Vale (NYSE: VALE) on the Samarco iron ore mine in Brazil. In 2015, a dam burst at that mine, which forced the companies to suspend production. They've had to repair the damage this disaster caused to the environment, which weighed on their profitability. If BHP experiences another issue at one of its noncopper mines, it will negatively impact its ability to fully benefit from that sector's upside.
While BHP's diversification does limit its overall upside to the copper market, it has meaningful growth potential in that sector. Not only has it already approved the Spence Growth Option, but it could also green-light large-scale projects in the U.S. and Australia. That copper-powered growth makes it one of the top stocks in the sector to consider owning for the long haul.
Image source: Getty Images.
Freeport-McMoRan is one of the largest companies by total production focused on copper. The U.S.-based miner operates across North and South America as well as Indonesia. In addition to copper, these mines also produce gold and molybdenum. Copper, however, contributed roughly 75% of the company's revenue in 2018.
In North America, Freeport operates seven open-pit mines that produce copper and molybdenum as well as some gold and silver as by-products. The biggest is its 72%-owned Morenci mine, which was the world's sixth-largest copper mine in 2018.
The company also operates two copper mines in South America: Cerro Verde in Peru and El Abra in Chile. Cerro Verde is the largest of those two (and the fourth-biggest worldwide copper producer in 2018). That mine also produces some molybdenum as well as a bit of silver.
Finally, the company holds a minority stake in the Grasberg mine in Indonesia. It's one of the biggest copper and gold deposits in the world (Grasberg was the third-largest copper-producing mine in 2018).
Freeport-McMoRan's global copper business produced 3.8 billion pounds of the metal in 2018. While the company makes some money on gold and molybdenum sales, copper is its main profit center, meaning changes in the price of copper can have a significant impact on the company's cash flow. Heading into 2019, for example, Freeport estimated that it could produce $1.8 billion of operating cash flow, assuming copper averaged $2.75 per pound. However, the company also noted that for every $0.10 per pound the price of copper was above or below that level for the year, it would impact cash flow by $315 million. Freeport has significant leverage to higher copper prices as well as substantial exposure should its price decline.
Freeport-McMoRan has relatively low copper production costs. In 2019, the company estimates that after taking into account the credits it earns for selling by-products like silver, it can produce copper for $1.73 per pound. Because of that, it can generate lots of cash when the metal is above that price.
On the one hand, Freeport-McMoRan's copper business is in a bit of a transitional phase. That's because it sold a significant portion of its stake in the Grasberg mine in 2018. That helped end a dispute with the government of Indonesia, which wanted that strategic asset under local control. As a result, the company's copper output is on track to decline to 3.3 billion pounds in 2019. However, it should rebound to 3.5 billion pounds in 2020 and reach 4.2 billion pounds in 2021.
Two factors should power that growth. First, the company is investing $850 million in the Lone Star development in the U.S., which is between its Stafford and Morenci mines. This project should produce 200 million pounds of annual copper output when it comes online at the end of 2020. The company sees even more upside at this location in the future, projecting that the mine could potentially turn into another Morenci.
Meanwhile, the other driver of Freeport-McMoRan's growth is Grasberg. The company and its partner are expanding that mine, which is on track to grow its copper sales from 620 million pounds in 2019 up to 1.7 billion by 2022.
While the Grasberg mine is a significant growth driver for Freeport-McMoRan, that location has been a source of trouble over the years. The company has encountered work stoppages, export curtailments, and a host of other issues. That ultimately forced it to hand over control to a local owner, which reduced Freeport's stake in the mine to 48.8%. While this deal should enable the company to continue operating through 2041, given its past issues, future problems could arise at this location that could impact production and profitability.
Despite some lingering concerns with Grasberg, Freeport-McMoRan has significant leverage to the upside of the copper market, which makes it a top choice for investors interested in the sector.
Rio Tinto is a lot like BHP Group in that it's a global mining giant. In addition to copper, it also produces iron ore, aluminum, diamonds, uranium, and several other minerals.
Rio Tinto's copper operations consist of the following assets:
- A 30% interest in the BHP-operated Escondida mine in Chile.
- A stake in Oyu Tolgoi, which is one of the largest known copper and gold deposits in the world.
- The wholly owned Kennecott Mine in the U.S.
- A 55% interest in the Resolution Copper project.
In 2018, Rio Tinto produced 634 kilotons of copper, which made it a top-10 global producer.
While Rio Tinto is a large-scale copper producer, like BHP, it makes most of its money producing iron ore. In 2018, that metal supplied 62% of its underlying EBITDA. Aluminum was second at 17%, while Rio Tinto's combined copper and diamond business was third at 15%, followed by energy and minerals at 12%.
Copper wasn't a major contributor to Rio Tinto's bottom line in 2018. However, it should be a significant growth driver in the coming years. That's because the company is investing $1 billion in its Kennecott mine to transition production to the South Wall area, which has higher ore grades. That project should start benefiting the company in late 2020. On top of that, Oyu Tolgoi is on track to become the third-largest copper mine in the world as it ramps up output. Rio is investing as much as $7.2 billion to finish the underground development, which will triple its overall production when it comes online in the 2022-to-2023 time frame.
Rio Tinto also has two other potential projects in development. The closest one to being approved is Resolution Copper, which it owns with BHP. The company is currently on track to receive the final environmental permit by the summer of 2021. That could enable it to move forward with this needle-moving project, which has the potential to supply 25% of America's annual copper demand. Rio Tinto also discovered an exciting copper-gold deposit in Australia called the Winu Project. While it's still in the early days of exploration, the company is optimistic that it could be a key copper growth driver.
One of the biggest risks for copper-focused investors is that Rio Tinto makes most of its money on other commodities. While that lowers its overall risk profile, it also limits its upside to higher copper prices.
Another concern with Rio Tinto is that its biggest near-term growth driver is Oyu Tolgoi in Mongolia. The government of Mongolia owns a 34% interest in that project, which could be a concern given the issues Freeport-McMoRan has faced in Indonesia. Another potential problem is that Rio Tinto owns its stake in this mine through its investment in Turquoise Hill Resources (NYSE: TRQ). That company holds the other 66% of Oyu Tolgoi, which gives Rio Tinto a 51% interest based on its ownership stake in Turquoise Hill Resources. This relationship adds some complexity and risk. Instead of Rio Tinto funding the expansion of Oyu Tolgoi with its strong balance sheet, Turquoise Hill is financing its share. That's a concern, since the company only has enough financial resources to last it through 2020 at its current spending rate. It might need to sell stock to raise cash, which could dilute Rio Tinto's stake.
While copper is a smaller part of Rio Tinto's overall business right now, it has the potential to be a major growth driver in the coming years. Not only will it benefit from the completion of Oyu Tolgoi's underground mining operations, but it also has further upside from Resolution Copper and the Winu project. Those projects make it a top option for investors with a very long-term view of the copper market.
Image source: Getty Images.
Southern Copper is a copper-focused producer, with operating mines in Mexico and Peru as well as exploration activities in Chile. The company also produces some molybdenum, zinc, lead, coal, and silver.
In 2018, Southern Copper produced 884 kilotons of copper across its portfolio of mines in Mexico and Peru. That made it the fifth-largest global copper producer. The biggest contributor was the Buenavista mine in Mexico, which produced 414 kilotons of copper in 2018, making it the eighth-largest such mine that year.
Copper is by far Southern Copper's biggest moneymaker. In 2018, copper supplied 80% of its revenue. Molybdenum was a distant second at 7%, followed by zinc at 5%, silver at 4%, and all others at 4%.
Southern Copper also has significant upside to the growing global copper market. The company holds the second-largest known copper reserves in the world behind Codelco, which the Chilean government owns. The company has approved several expansion projects that will drive near-term growth. The largest is the $1.4 billion Tia Maria mine in Peru that should add 120 kilotons of annual copper output when it comes online in 2022. Beyond that, the company is evaluating an investment opportunity of $2.8 billion to construct the El Arco mine in Mexico, $2.8 billion on Los Chancas, and $2.5 billion on Michiquillay, which are both in Peru. These new mines and other expansions at its existing locations could enable Southern Copper to more than double its copper output by 2026 to 1,808 kilotons.
Aside from its substantial growth prospects, another thing that makes Southern Copper stand out as a top option for investors is its low-cost operations. In 2018, the company produced copper for a net $0.87 per pound after taking into account by-product credits, which is among the lowest in the sector. The company sees that number falling to $0.80 per pound in 2019 as it benefits from a project at its Toquepala mine in Peru.
One notable risk with Southern Copper, however, is its ownership structure. Mexican mining and industrial giant Grupo Mexico owns a majority stake in the company at 88.9% as of the end of 2018. Because of that, it effectively controls the company, which leaves public market investors with little say. As such, it could approve projects that benefit other companies it owns, take Southern Copper private, or make other governance moves that go against the interests of outside investors.
Despite some concerns surrounding its ownership structure, Southern Copper has more leverage to the upside of the copper market than any other producer. Not only does it have the lowest production costs in the sector, but it also has unparalleled growth prospects. Those factors make it one of the best ways to profit from the growth of the copper sector in the coming years.
Several solid options for copper-focused investors
Copper demand is on track to soar in the coming years, making it a compelling sector for growth-focused investors. It's also a back-door way to play the renewable energy sector, given that the industry consumes significantly more copper than traditional energy sources.
While all copper-producing companies should benefit from the sector's growth, BHP Group, Freeport-McMoRan, Rio Tinto, and Southern Copper are best positioned to capture the upside.
They're not without risk: Profitability could be impacted by both sectorwide issues, such as copper price volatility, and company-specific issues. However, they have visible growth prospects and low costs. Their profitability could soar as output rises alongside the price of copper, which has the potential to drive big gains in their stock prices.
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