The copper commodity cycle took nasty U-turn in 2008 and so too have the companies that produce the red metal. A full-blown financial crisis and plunging commodity prices crippled copper stocks as investors took a hurried flight to safety, and heading into 2009, investors can no longer take comfort in the dividends offered by the copper mining companies. Producers are now in survival mode, dividend cuts will be the fastest and easiest way for them to get much-needed cash.

Until we see the signs a turnaround in the global economy, copper stocks remain a risky place to put your money.
Consider the outlook for a few stocks with high-stake positions in the chaotic world of commodity copper.
Freeport-McMoran Copper & Gold (NYSE:FCX)
All is not well at Freeport-McMoran, which mines and produces copper from its properties in Indonesia, North America, South America and Africa. In the face of plunging commodity copper prices, the company is taking drastic measures to cut production levels plus operating and capital expenditure costs. Based on these moves, it's hard to envision growth any time soon. Even worse, Freeport recently suspended the $2.00 per share dividend that had drawn investors to the stock in the midst of the global slowdown. The stock price, consequentially, has taken a beating. Given the uncertain economic climate, it's probably wise to wait until the dust of the commodity copper market settles before buying.

Southern Copper (NYSE:PCU)
Freeport-McMoran probably won't be the last copper-mining company to slash its payouts to shareholders. At Southern Copper, lower cash generation and high CAPEX requirements will likely stretch the company's earnings and leverage ratios and could translate into big cuts for the stock's hefty dividend. Southern Copper, which mines and produces copper and other minerals in Peru, Mexico and Chile, is cutting back on supply as demand dries up and commodity prices remain down at these levels. Some observers suggest that as the as top ranking holder of total copper reserves of any publicly traded company, Southern Copper represents a pure play on a rebound in the copper price. That may be the case, but it's probably best for investors to take nibbles rather than big bites of the stock. (To spot a dividend cut before it happens, read Is Your Dividend At Risk?)

Sterlite Industries India
(NYSE:SLT)
Sterlite Industries, which went public in the summer of 2007, had big plans for expanding operations around the world, but plunging metals prices are making it tricky for India's third largest mining company to make them happen. Now that conserving cash is Sterlite's priority in the current market environment it's not clear whether its proposed takeover of bankrupt U.S.-based copper miner Asarco for $2.6 billion in cash will go through. Analysts suggest the deal could be a loss-making proposition. That said, the stock has the fallen to levels unthinkable a year ago, making it a contrarian play for the courageous.

Encore Wire (Nasdaq:WIRE)
Encore does not produce copper, but as a maker of copper wire and electrical cable it certainly buys a lot of the stuff. With copper prices falling, you would be forgiven for thinking Texas-based Encore would make an attractive counter-market investment. Indeed, the company was able to produce better-than-expected gross margins in the third quarter. Even so, it's hard to imagine Encore's margin gains compensating for likely top line sales contraction heading into next year. In North America, where Encore gets all of its sales, commercial and residential construction growth is grinding to a halt and demand for materials is drying up more rapidly than anywhere in the world.

Bottom Line
As copper and copper-related stocks fall in value, the risk/reward situation gets better for investors. But assuming that the down part of the economic cycle continues, there is a good chance these stocks could head further down too, making them dicey contrarian plays heading into 2009.

For further reading, see Commodities That Move The Markets and How To Invest In Commodities.

Related Articles
  1. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  2. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  3. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  4. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  5. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  6. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  7. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
  8. Investing News

    A 2016 Outlook: What January 2009 Can Teach Us

    January 2009 and January 2016 were similar from an investment standpoint, but from a forward-looking perspective, they were very different.
  9. Mutual Funds & ETFs

    3 Vanguard Equity Fund Underperformers

    Discover three funds from Vanguard Group that consistently underperform their indexes. Learn how consistent most Vanguard low-fee funds are at matching their indexes.
  10. Investing News

    Alphabet Earnings Beat Expectations (GOOGL, AAPL)

    Alphabet's earnings crush analysts' expectations; now bigger than Apple?
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center