It was interesting to see in a recent report from Goldman Sachs the comment, presented almost as an aside, that the major copper companies it was analysing had collectively outperformed the copper price by 34% over the past 12 months, in spite of the fact that copper itself had been on a tear.
The comment lies at the basis of a truism well-known to investors in the mining sector: mining companies in any given commodity always outperform basic metals prices during a bull run.
The reasons are simple enough.
A metal like copper, whether traded forward or at spot, can only rise and fall by degrees. Those that are mining it though, operate on a what’s effectively a fixed cost base, and that means that any increase in copper price goes directly to margin and straight down to the bottom line.
So, if the copper price doubles, as it has done over the past 12 months, it’s quite likely that profits from actually mining it could triple or quadruple, depending on the precise cost base of any given company.
It’s that dynamic that lies behind the tripling of Antofagasta’s (LON:ANTO) share price over the past 12 months or so, and the quadrupling of First Quantum’s (TSE:FM).
And these are no mean companies. Antofagasta is now worth just shy of GBP19bn, while First Quantum is worth more than C$20bn.
Is it any wonder that plenty of seasoned pros turn to equities rather than metals when a bull run is on, given how much higher returns can be?
On the other hand, holding the metal itself does mitigate a significant amount of risk, both of the operational kind and of the political kind.
First Quantum and Antofagasta are tried and tested go-to companies for copper bulls, but even they are unable to counteract the negative effects of political upheaval or, crucially at the current historical moment, disease.
First Quantum has mines on the famous copper belt in the Democratic Republic of Congo and Zambia, where historically sequestration and corruption have both featured heavily. Antofagasta is in Chile, equally one of the most famous copper mining destinations in the world, but also one subject to the vagaries of strikes, government intervention and, at times like this, the potential for mines to be shut down for reasons of quarantine.
In the past 12 months neither of these companies has faced significant market headwinds because of the virus, but remember that 12 months ago the virus was at its height. Those spectacular 12 month gains are coming off a ten-year low in the case of First Quantum and a five year low in the case of Antofagasta. Copper itself, by contrast, was only went to a four-year low when the market hit its coronavirus nadir.
In this context, attitude to risk becomes all important.
There’s plenty of ways to play the copper price directly via ETFs run by the likes of Wisdom Tree and a host of others. These are relatively safe financial instruments that will track the straightforward movements of copper itself.
And finally, for those with an appetite for real risk, there’s the explorers, like Kavango Resources (LON:KAV), Power Metal Resources (LON:POW) and Kincora Copper (CVE:KCC), which can move around significantly on drill results and, if they strike it really big, can often move up tenfold or more. The best recent example of that last scenario is Solgold (LON:SOLG), a company that was worth a few million pounds some years ago before it picked up its copper exploration ground in Ecuador. It’s now worth over GBP550mln.
So, in the end, it’s a matter of taste, risk appetite, and strategy. For now though, at least one thing is certain: the momentum is with copper.