What to Know About Copper Investing (FCX, FM.TO)

Copper is the unassuming metal that has spent millennia as third fiddle to gold and silver, its more prestigious counterparts in Group IB of the periodic table. Copper is such a third-rate metal that it has to be alloyed with tin before it's used to make Olympic medals.

Despite copper’s status, it’s among the most versatile metals in existence. Couple its utility with the low price and this might be an opportune time for investors to take a closer look.

Oversupply has resulted in copper trading in the range of $2.00 to $4.50 a pound from 2009 through 2018, where it has bounced around a level of $3.00 for much of 2018. That the price is in the middle of its range might make copper sound like an investment to consider, but one drawback is that it comes in lots that are prohibitively large (25,000 troy pounds) for the everyday investor. That’s why most people who are looking to make copper part of a diverse portfolio prefer to put their money in companies that make their livelihood from the metal, as opposed to copper outright. 

Phoenix-based Freeport McMoRan (FCX) is one of the largest copper producers. It extracts copper everywhere from East Congo to Peru to Indonesia, but most of its mines are located in the United States – particularly Arizona and New Mexico, with smaller interests in Colorado.

Freeport-McMoRan’s recent fortunes have moved in the same direction as that of the metal, only to an even greater extent. The stock was trading at its lowest levels since the turn of the century in 2016 as the price of copper dipped to around $2.00 – this coming after the stock hit $60 a share in 2011. In the years since, the company's shares have steadily increased, along with the price of the commodity, to a price of around $12.50 per share as of Nov. 2018.

This is hardly a recommendation for purchasing a stock, but then again we are talking about a company in its second century, whose offerings include a diverse base of raw materials. Freeport-McMoRan also mines molybdenum. And let’s just ignore for a moment that those commodities also happen to still be trading cheaply right now. Of note, Freeport McMoRan has sold off its oil and gas assets over the years, notably at a large loss from where it purchased McMoRan Exploration. 

You don’t get wealthy on Wall Street by buying shares of successful companies whose success has been reflected in their high stock prices. Well, you can, but your chances of riches are a lot better when you find a temporarily wounded stock that’s about to bounce back to life. Our case study in point Freeport McMoRan does more than merely dig the copper ore out of the ground and send it downstream to the refiner. The company also makes electrode wire, cupric pesticides, cathodes and more, industry-critical products that are profitable even during periods when copper itself has been less so.

If taking delivery of copper today sounds too risky or requires too much of a financial commitment for you, there are is futures. Copper futures trade up to five years out and should indicate to some extent what the market thinks the price will be throughout the rest of the decade. And what the market thinks is more of the same, with a heightened possibility of stasis. Contracts fluctuate by barely a penny an ounce, which of course would be a boon to anyone bullish enough to believe that the current low price of copper is a universal minimum and not merely a local one.

But even accounting for the narrow range of futures prices, such investing is conservative compared to investing in most copper mining companies. On the TSX Venture Exchange, Canada’s key place for small- and nano-cap, where a disproportionate number of listed companies deal in precious and semiprecious metals. The Canadian copper industry ranges from established businesses such as Vancouver’s First Quantum Minerals (FM.TO), with its $9 billion market capitalization (as of Nov. 2018), to aggressive firms that will likely face quick de-listing.

Gold and silver cost 400 and 5 times more than copper, respectively. The reasons can be largely explained by both material scarcity and by enduring public opinion. The good news is that the cheaper a commodity is, the more volatile its price can be. Gold isn’t going to double in value in a month, not from a starting price of over $1,000 an ounce. Copper very well could. 

The chance for large gains is there for copper investors. So is the chance for losses, but in absolute terms copper is close to the lower bound. Because of copper’s commercial importance, and the concomitant infrastructure devoted to getting it to market, its price is never going to fall to zero. A smart investor measures the likelihood and magnitude of both upside and downside and places her chips accordingly. In the case of copper, buyers seem to be in little danger of losing all their money, in the short term, at any rate.

Disclosure: The author held no position in either of the companies listed in this article when it was written.