Copper prices have dropped 18% in recent weeks, creating a long-term opportunity to get in on some cheap copper-mining giants with generous dividend payouts. Their prospects will depend on a major technological transition: the move from gasoline-powered to electric vehicles.
“If you’re bullish on global growth over the next 18 to 24 months, you have to own copper-related assets, especially since current prices aren’t high enough to fund new-mine development,” says Adam Johnson, founder and author of the Bullseye Brief financial newsletter. “Longer term, and this is key, rising electric-vehicle production will shift the entire demand curve since EVs require multiple times the copper content of internal-combustion engines.”
Investors should consider buying shares of a handful of European-based miners: Rio Tinto (ticker: RIO), Glencore (GLEN.UK), and Anglo American (AAL.UK). All are diversified, but they’re also among the largest copper miners. Better yet, they have hefty dividends of 5%, 5.1%, and 4.7%, respectively.
The stocks are cheap relative to the main U.S. rival, Freeport-McMoRan (FCX), which trades at almost 14 times next year’s earnings and has a measly 1.8% dividend. Rio Tinto shares trade at a P/E around 11; Glencore’s and Anglo American’s at less than 10. And Rio Tinto announced a $3.2 billion share buyback earlier this month. That news “reinforces our positive view of Rio’s capital returns potential,” said a recent report from U.K. broker J.P. Morgan Cazenove.
Meanwhile, New York research firm CFRA says it expects the return on equity for Glencore to move above its recent average level. The firm also sees the potential for meaningful cost reductions to improve margins at Anglo.
Besides the favorable valuations, these stocks will benefit from the switch to electric vehicles. To make these cars and trucks, manufacturers will require an additional 1.7 million metric tons of copper each year by 2027, according to the International Copper Association. Battery-powered EVs use an average of 183 pounds of the metal versus between 18 and 49 pounds for conventional cars, according to data from the Copper Development Association. The difference is even starker for buses. A bus running with a hybrid electric and diesel engine needs 196 pounds of copper, but a fully electric-powered bus requires 814 pounds. Charging ports for electric cars also need copper.
Even without EVs, the market isn’t producing enough newly mined copper to keep up. Global mined production totaled 20 million tons last year, versus demand of 23.8 million tons, according to data from the International Copper Study Group. The deficit typically gets filled through recycled metal or a drawdown of inventories. Moreover, auto-related demand hasn’t yet peaked, and major increases in mined supply can take years to develop.
Mining is risky. The industry has long been highly cyclical, with deep troughs and high peaks. The recent surge in the greenback presents headwinds to prices, which are dollar-denominated. Mines can also get disrupted by earthquakes, asset forfeiture, and environmental calamities.
Still, the shift from fossil-fuel-powered vehicles to electric-powered ones looks set to be a secular, long-term trend from which mining company shares should benefit. During the 2008 recession, usage of refined copper fell by less than 1%, or 148,000 tons, according to ICSG. However, usage of copper in EVs and associated hybrid vehicles is expected to add more than 200,000 tons to demand this year, which will rise steadily for the next decade, according to a 2017 study commissioned by the International Copper Association.
