Copper – In Vogue with Institutional Investors

When a colleague of mine spent 3 hours on a motionless train due to the theft of a crucial copper wire belonging to the signal box, you know this commodity is hot stuff. We read about the surge in copper prices but is this another bullish commodity play or a unique case? We will look at the classic copper stocks like Freeport McMoran Copper and Gold (NYSE: FCX), Antofagasta (LON:ANTO), First Quantum Minerals; (TSE:FM) as well as smaller names like Central Asian Metals (LON:CAML) and Ivanhoe Mines (NYSE:IVN) plus the copper ETFs such as ETFS Copper (LON:COPA).

Apologies if you know this already but I found it very interesting to learn that the average copper mine in production is 50 years old. They are old, deep and expensive to run. It often takes 16 years to go from discovery to production and many projects were mothballed in 2008. With demand strong it is easy to see the case for buying copper companies. If China has been buying copper for stockpiling, as an HSBC analyst believes, rather than for industrial needs there is reason to be cautious. That aside, all other factors are positive.

Freeport McMoran (FCX) is the main copper miner and there is no surprise to see short selling at a 3 year low and institutional ownership (in our peer group of funds who lend their shares) at an all time high too. Talk about consensus investing. If there are any clouds on Freeport’s horizon could they be from the ESG lobby who point out various local issues including being sued for billions of dollars by a Papua tribe in South Jakarta according to reports cited by RepRisk.

The London listed equivalent large cap miner with large copper assets is Antofagasta (ANTO). Investor sentiment isn’t quite so bullish here. Short selling is low but gently rising to almost 2% while institutional ownership is close to 3 year lows. Out of interest, ANTO was recently downgraded by various analysts.

Canada’s First Quantum Minerals (FM) has, on the face of it, lots of short selling but on closer inspection this is for hedging rather than directional trading due to its convertible bond. Meanwhile, institutional ownership is close to a 3 year high at 28% of the shares in issue.

As already noted, mining copper is very capital intensive and long term in nature so one wonders if investors are keen to remove the risks associated with investing in single companies by using an ETF. ETF Securities offer a non-physically backed instrument with the ticker COPA. We cannot see very much institutional interest in this however.

For those with a mid cap bent, the recently listed Central Asia Metals (CAML) could be the answer according to their broker Mirabaud Securities. It is already producing 10k tons of copper per annum and the global annual supply is 15m tons. Funds who lend own 2.71m shares or 3.2% of the company which is a reasonably promising investment from the big funds given it has only been listed 4 weeks.

Rio Tinto and Ivanhoe Mines (IVN) have made the most significant recent copper discovery but will not be producing anything until 2013, having made the discovery in 2001. This Mongolian mine will produce 500k tons a year. IVN was heavily shorted from April to June but the 6% of shares sold short were rapidly bought back when the price ramped up from 14 to 24 CAD since then.

When looking at the new plumbing going into my house I am surprised to see that copper pipes are still the key component. Have we really no alternatives in 2010 than to rely on deep and old mining?