Copper stocks quietly winning

Dr Copper continues to dispense the kind of medication that supports ongoing increases in copper mine cash flows.

JOHANNESBURG - - 

As a grouping, broadly classified, copper stocks have done exceptionally well over the past year or so, providing some of the best returns among global mining stocks, second only to the far smaller primary silver mining subsector. Pure copper miners are difficult to find, but a selection of 100 listed copper and related stocks, including explorers, developers and miners, indicates an average "bounce" from low prices seen over the past year of around 231%, measured on a weighted average basis.

Copper miners were distinguished to a certain point by suffering one of the lesser indignities when most commodity prices fell out of bed, generally commencing around mid-2008. Copper fell from just above US$4.00/lb to a low of US$1.28/lb in December, but even at these levels, most genuine copper miners were still making cash profits.

For many other miners, ranging from those in potash to those digging bauxite for refining into alumina, prices fell to levels where cash profits turned negative. In some subsectors, severe cutbacks were made in production, as seen in potash. Most subsectors, with the exception of gold and silver, were forced to implement one or more actions to mitigate the damage; there were even a number of closures.

Some copper miners are known to have pedigrees; those with successful track records inevitably have institutional memories of how cycles can turn quickly in either direction, and inevitably have developed the habit of accumulating cash to ride the down cycles. London-listed Chilean copper miner Antofagasta - which also has businesses in transport and water, produces a little molybdenum, and will also be producing gold in about two years' time - serves as an illustration of how to be around when the next round is called.

Antofagasta produced nearly US$2bn in operating cash flows in 2007, and not much less than that in 2008, which included six months of weak dollar copper prices. The miner ended 2008 with net cash of nearly US$3bn on its balance sheet. While operating cash flows for the first half of 2009 were practically zero, Antofagasta paid out US$528m in cash dividends, US$100m more than for the comparable period in 2008. Net cash on 30 June 2009 was a healthy US$1.8bn.

Copper prices have recently been trading at levels around US$3.00/lb, continuing to support returns to substantial cash flow profitability for Antofagasta and other copper miners around the world. Dollar copper prices have recorded one of the best "bounces" among commodities, and appear to be broadly supported by both fundamentals and sentiment.

It's probably no coincidence that four of the world's five top copper producers - Codelco, the biggest is unlisted - are trading at or close to year-highs. The four are diversified stocks, and are also benefiting from the status of size, along with inclusion in various indices.

Freeport-McMoRan, the world's biggest copper producer after Codelco, is also a global Tier I miner of gold, and also molybdenum; BHP Billiton, Xstrata, and Rio Tinto each rank as even more diversified, also benefiting from the general recovery in metal prices, a process in place now for nearly a year. There are many other stocks under the broad classification of copper that are looking to catch up with the big, and other leading, names.

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