Copper. It’s the unassuming metal that has spent millennia as third fiddle to gold and silver, its more prestigious counterparts in Group IB of the periodic table. Poor copper is so maligned that it has to be alloyed with lowly tin before they’ll even deign to make Olympic medals out of it.

Despite copper’s tertiary status, it’s among the most versatile metals in existence. Couple its utility with the planet having a sale on copper, and this might be an opportune time for investors everywhere to load up.

Buyer's Market

Oversupply has resulted in copper trading in the range of $2.30-2.40 a pound which is a 6-year nadir. That might make copper sound tempting to buy, but one drawback is that it comes in lots that are prohibitively large (25,000 troy pounds) for the everyday investor. That’s why most people who are looking to make copper part of a diverse portfolio prefer to put their money in companies that make their livelihood from the metal, as opposed to copper outright. (See also: Oil Gains from Output Fall; Copper Weakened, Gold Dormant before Fed.)

Phoenix-based Freeport McMoRan (FCX) is the world’s largest copper producer. It extracts copper everywhere from East Congo to Peru to Indonesia, but most of its mines are located in the United States – particularly Arizona and New Mexico, with smaller interests in Colorado.

Freeport McMoRan’s recent fortunes have moved in the same direction as that of the underlying metal, only to an even greater extent. Adjusting for inflation, the stock is trading at its lowest levels since the turn of the century. The company hasn’t turned a profit in 3 quarters, instead losing $7 billion during that time. This is hardly a recommendation for purchasing a stock, but then again we are talking about a company in its second century, whose offerings include a diverse base of raw materials. (Freeport McMoRan also mines molybdenum and drills for oil and gas. And let’s just ignore for a moment that those commodities also happen to be trading cheaply right now.)

You don’t get wealthy on Wall Street by buying shares of successful companies whose success has been reflected in their high stock prices. Well, you can, but your chances of riches are a lot better when you find a temporarily wounded stock that’s about to bounce back to life. Our case study in point Freeport McMoRan does more than merely dig the copper ore out of the ground and send it downstream to the refiner. The company also makes electrode wire, cupric pesticides, cathodes and more, industry-critical products that are profitable even during periods when copper itself has been less so.

Speculation Nation

If taking delivery of copper today sounds too risky or requires too much of a financial commitment for you, there are always futures. Copper futures trade up to 5 years out, and should indicate to some extent what the market thinks the price will be throughout the rest of the decade. And what the market thinks is…more of the same, with a heightened possibility of stasis. Contracts fluctuate by barely a penny an ounce, which of course would be a boon to anyone bullish enough to believe that the current low price of copper is a universal minimum and not merely a local one.

But even accounting for the narrow range of futures prices, such investing is positively conservative compared to investing in most copper mining companies. On the TSX Venture Exchange, Canada’s breeding ground (and killing field) for small- and nano-cap concerns, a disproportionate number of listed companies deal in precious and semiprecious metals. The Canadian copper industry ranges from established businesses such as Vancouver’s First Quantum Minerals (FM.TO), with its $6 billion market capitalization, to plucky and aggressive firms that were first listed last year and will be delisted before Canada elects a prime minister (and well before the United States elects its next president.)

The Bottom Line

Gold and silver cost 7000 and 91 times more than copper, respectively. The reasons can be largely explained by both material scarcity and by enduring public opinion. The good news is that the cheaper a commodity is, the more volatile its price can be. (Gold isn’t going to double in value in a month, not from a starting price of $1,125 an ounce. Copper very well could.) The chance for large gains is there for copper investors. So is the chance for losses, but in absolute terms copper is close to the lower bound. Because of copper’s commercial importance, and the concomitant infrastructure devoted to getting it to market, its price is never going to fall to zero. A smart investor measures the likelihood and magnitude of both upside and downside, and places her chips accordingly. In the case of copper, buyers seem to be in little danger of losing all their money … in the short term, at any rate.

Disclosure: The author holds no position in either of the companies listed in this article.


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