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Falling China = Copper Carnage: Dump These Stocks - Analyst Blog

It was a traumatic Monday for the Chinese stock market as the Shanghai Composite Index, which is China's version of the Dow Jones Industrial Average, dropped more than 8%, its steepest one-day fall in eight years. It wasn't a surprise though that the downslide created a havoc on copper, one of the most economically sensitive metals, which now languishes at a six-year low.

Over the last two months, Chinese stocks have been in a turmoil. On Jun 12, the Shanghai Composite soared dramatically 150% to a seven-year high at 5,166 points. However, the bubble soon burst with the index reversing course and losing 30% of its value in a few weeks. The fall came on the back of mounting concerns that the year-long bull-run might be coming to an end amid valuation concerns and a likely economic slowdown. Moreover, the possibility of Greece defaulting on payments to creditors had its effect.

The Chinese government took immediate firefighting measures to stabilize the market by banning major shareholders of publicly traded companies from selling stocks, ordering companies to buy back some of their own shares, halting IPOs of stock, and slashing rates to a record low in an effort to pump more money into the system. However, after few weeks of relative calm, which seemed to suggest that the government's plan was working, the Shanghai index skidded again on Jul 27.

The CSI300 index of the largest-listed companies in Shanghai and Shenzhen plunged 8.6%, to 3,818.73 points. The Shanghai Composite Index lost 8.5%, dropping to 3,725.56 points -- its worst daily percentage fall since Feb 27, 2007. The smaller Shenzhen Composite fell 7% to 2160.09 and the ChiNext, composed of small-cap stocks and sometimes known as China's Nasdaq, closed 7.4% lower at 2683.45.

Since the Shanghai Composite peaked in June, it has lost 28% of its value. Stocks plunged across the board, with 2,247 companies falling, while only a paltry 77 companies gained. This abrupt drop appears to signal worried investor sentiment and lack in confidence in the government's efforts to prop up the equity markets.

The slowdown in the world's second-largest economy does not bode well for copper which was already caught up in a downward spiral due weakness in Europe, a stronger greenback and the perennial problem of oversupply. China has been an engine of global growth and is known for its insatiable appetite for commodities.

With only approximately 4% of global copper reserves, the country accounts for more than 42% of global copper consumption. As the country realigns its economy and transitions from government spending and investment-fueled growth to private-sector consumption, demand for the industrial metal has inevitably fallen.

China is the biggest importer of copper. China's copper imports have been steadily declining this year. The automobile sector is a major consumer of copper products and according to estimates, copper content in an average mid-sized vehicle totals approximately 50 pounds.

As per data issued by China Association of Automobile Manufacturers, passenger car sales in June declined by 3.2% year over year, the first annual decline in China's passenger car sales since Feb 2013. The slowdown in China's automobile sector is a matter of concern for copper producers. China's soft property market is also negatively affecting copper demand.

Hence, in tandem with the China stock market crash, copper prices tumbled to a six-year low on Monday. Copper for September delivery on the Comex division of the New York Mercantile Exchange tumbled to $2.336, a level not seen since June 2009, before ending at $2.353, down 1.22%.

In-line with the recent crash in copper prices, we suggest three copper stocks to steer clear of at the moment. We have screened copper mining stocks that have a Zacks Rank #4 (Sell) or #5 (Strong Sell) and have witnessed downward estimate revisions over the past few weeks.

Nevsun Resources Ltd.NSU

Headquartered in Vancouver, Canada, Nevsun Resources acquires, explores, develops, and operates mineral properties in Africa. The company explores for gold, copper, zinc, and silver deposits. Its principal project is the Bisha property consisting of the Bisha Mining license, the Harena Mining license, and the Mogoraib River exploration license, located in Western Eritrea, North-Eastern Africa.

This Zacks Rank #4 stock has delivered negative one-year-return of 9.13% and negative year-to-date return of 0.75%. The company also holds a negative earnings growth estimate of 38.33% for the second quarter of 2015 and a projected decline of 36.7% for 2015.

The company had delivered a negative earnings surprise of 25% in the last quarter and an average negative earnings surprise of 9.82% in the past four quarters. Moreover, the Zacks Consensus Estimate for the second quarter and fiscal 2015 have undergone negative revisions over the past 30 days.

Vedanta Ltd.VEDL

Based in Panaji, India. Vedanta operates as a subsidiary of Vedanta Resources Plc. Vedanta primarily engages in exploring, extracting, and processing minerals, and oil and gas. The company produces oil and gas, zinc, lead, silver, copper, iron ore and aluminum.

This stock has delivered negative one-year-return of 58.89% and negative year-to-date return of 41.39%. The stock holds a Zacks Rank #4. Moreover, the Zacks Consensus Estimate for fiscal 2016 has undergone negative revisions over the past 60 days.

Teck Resources Ltd.TCK

Vancouver, Canada-based Teck Resources explores, develops and produces natural resources in the Americas, the Asia Pacific, Europe and Africa. Its main products include copper, including copper concentrates and cathode copper; steelmaking coal; and refined zinc and zinc concentrates.

This stock has delivered negative one-year-return of 70.01% and negative year-to-date return of 50.14%. It carries a Zacks Rank #4.

The company also holds a negative earnings growth estimate of 35.19% for the second quarter of 2015 and a projected decline of 5.43% for 2015. The company had delivered a negative earnings surprise in three of the past four quarters with an average negative earnings surprise of 6.77%. Moreover, the Zacks Consensus Estimate for the second quarter and 2015 has moved south over the past 30 days.

Bottom Line

Exiting certain underperformers at the right time helps maximize portfolio returns. With copper prices at a six-year low and volatility in the Chinese markets, we believe it will be a prudent move to get rid of these stocks at the moment.

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TECK RESOURCES (TCK): Free Stock Analysis Report

NEVSUN RESOURCS (NSU): Free Stock Analysis Report

VEDANTA LTD (VEDL): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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