Copper: Buying Opportunity In Miners

December 13, 2010

 

COPX, the Copper Miners ETF by Global X, gives you exposure to those that are directly responsible for the mining and production of the red metal—and if the supply forecasts are right, they're ideally positioned to benefit from continuing high price levels:

 

Copper Price vs. COPX

 

But COPX only started trading just this past April, so it is difficult to read any long-term trends into the data. Still, for what it's worth, the fund is up 29 percent since inception, while copper prices have risen only 17 percent during the same time period.

What's interesting to note is that copper outperformed copper miners from May to September, after which a dramatic switch occurred—by mid-September, miners began to lead copper prices.

 

A Tale Of Two Stocks: FCX And CUM

Two of the companies within COPX are Freeport-McMoRan Copper & Gold Inc. (NYSE: FCX) and Copper Mountain Mining Corp (TSE: CUM).

Freeport is the world's largest copper producer, with a market cap of $53.15 billion. Copper Mountain is less than 1/100 of its size, with a market cap of $500 million.

But it's not just in size where these two companies differ:

 

Copper Stocks

 

Copper Mountain Mining Corp is a relatively new company that isn't scheduled to start production from its new copper project until June 2011. That's right—it hasn't produced a single ton of copper this year, but its stock price has jumped a whopping 171 percent YTD.

Meanwhile, Freeport makes up 5.08 percent of COPX's assets, while Copper Mountain only makes up 1.01 percent. That's a lesson worth remembering: When it comes to sector ETFs, the smaller outperformers can often be outweighed by the larger laggards.

Of course, there is always a risk/reward trade-off when investing in a single company within a sector—you forgo the benefits of diversification for the potential of a blow-the-doors-off success story. And for every Copper Mountain Mining Corp., 10 other companies ride your $10 down to penny stock without hesitation.

And what about Freeport? The well-established copper producer, which closely tracks copper prices, is up 39 percent on the year, as it benefits from low total cash costs per pound and the forecasted supply deficit.

As always, price movements of metals directly impact the stock prices of the companies that mine them. But right now, the market seems to be valuing the companies over the metal.

 

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