Federal Reserve Chairman Ben Bernanke didn’t give copper investors the promise of new stimulus spending when he chatted up the economy on Capitol Hill this week. And China, the metal’s biggest customer, still faces slow near-term growth. But those factors don’t negate the big opportunity copper offers investors right now.
Homebuilder confidence in the U.S. rose 6 points last month — its highest increase since 2002, according to the National Association of Homebuilders/Wells Fargo confidence index. Copper is an important metal in housing construction.
Property sales in China’s eastern provinces increased by 50% in June – and construction represents about 40% of demand, according to the Copper Development Assn. China’s low inflation also will make it easier for the government to increase stimulus — another boon for housing construction and copper demand.
Supply now appears to be dwindling, despite large copper surpluses in recent years. With lower supply and rising demand, copper prices could rise by as much as 14% by the end of this year, analysts say.
So, for investors who want to ride the potential copper bull, here are four ways to play it: a mining stock, an exchange-traded fund (ETF) and an exchange-traded note (ETN) and a futures contract.
Mining Stocks: When it comes to copper mining stocks, it’s hard not to like Southern Copper (NYSE:SCCO) right now. While year-to-date, miners like Freeport-McMoRan Copper & Gold (NYSE:FCX) and BHP Billiton (NYSE:BHP) are down more than 38% and 27%, respectively, SCCO is down just 5%.
With a market cap of nearly $27 billion, the stock is trading around $32 — more than 40% above its 52-week low last October. It has a price-to-earnings growth (PEG) ratio of about 0.8, indicating it’s undervalued, and a forward P/E of 11. As a sweetener, SCCO’s current dividend yield of 6.9%.
Copper ETF: Global X Copper Miners ETF (NYSE:COPX). This ETF tracks the Solactive Global Copper Miners Index, and its holdings include global firms like Southern Copper, Poland-based KGHM Polska Miedz, Grupo Mexico and South America mining and railroad company Antofagasta.
With about $26 million in assets, COPX is trading a little under $11 now, and it has an expense ratio a little on the high side at 0.65. The ETF has had a few bumps so far in 2012: Its year-to-date return is nearly –17%. It has been turning things around this month, though, as the fate of copper has rebounded. It also boasts a current dividend yield of nearly 8.4%.
Copper ETN: iPath Dow Jones-UBS Total Return ETN (NYSE:JJC). This is a slightly different way to play copper — an exchange traded note that gives investors exposure to copper futures, without the complexity of buying futures contracts. That’s different from the typical ETF, which contains actual securities or commodities.
JJC gives investors a cash payment at maturity based on the performance of the Dow Jones-UBS Copper Total Return Sub-Index. With $118 million in assets, JJC is trading around $44 and has an expense ratio of 0.75. Although the ETN’s year-to-date return is flat, it has begun to turn around and is up about 1% this month. If copper prices continue to rise, this ETN could deliver strong returns later in the year.
Copper Futures Contract: A final approach for investors who are bullish on copper is by going long on the red metal’s futures contract. One venue for copper futures is CME Group’s Commodity Exchange (COMEX) under the symbol HG.
A futures contract is an agreement to take physical delivery of 25,000 pounds of copper, which is priced per pound. On Wednesday, the price of September 2012 copper (the most actively traded contract) closed at a little over $3.47 a pound. Commodities futures contracts, however, aren’t for everyone. They’re complex investments, and best-suited for sophisticated, extremely active investors.
As of this writing, Susan J. Aluise did not hold a position in any of the securities mentioned here.