Sunday, May 13

Week 45 - Dr. Copper

Situation: Copper’s price/ton is often referred to as “Dr. Copper” because it is a predictor of economic activity. In recent years, this has been less true because growing countries have learned to stockpile copper during slack periods. Nonetheless, the build-out of infrastructure utilizes a lot of copper, much of which is sold as wires, tubes and rods made from copper or copper alloys. These are welded, brazed, or soldered into a final product. Therefore, infrastructure build-out affects many manufacturers, especially those that make mining and welding equipment: Caterpillar (CAT) and Lincoln Electric (LECO). Interestingly, gold producers also get caught in Dr. Copper’s web, since minerals containing the two elements are commonly found together. All copper mining companies produce significant amounts of gold, whether they admit it or not. And the largest gold mining companies are happy to point out that they also produce large amounts of copper: American Barrick (ABX), Newmont Mining (NEM), and Goldcorp (GG).

Here we go again! Talking about commodities in a blog geared to conservative investors who eschew buying stock options or buying stock with borrowed money. In our blogging, we go to great lengths to distinguish investing vs. speculating. The reality is that developing countries in Asia, the Middle East, East Europe, and Latin America rely on commodities to stoke the engines of commerce. In Week 43, we found that some commodity-related companies on the ITR Master List (Week 39) make sound long-term investments with limited downside risk (XOM, CVX, OXY, CNI, HRL, CHRW). In this week’s blog, we examine commodity-related companies that are on the cusp of qualifying as a sound investment, beginning with copper. As usual, we’ve limited our search to dividend-paying companies because low-cost DRIPs are the safest way to build a position. And, since we depend on access to the metrics accumulated by Standard & Poor’s, we will only include in our examination the largest companies outside the S&P universe.

For copper, we’ve identified 8 companies that are worth a close look (see attached Table) but 5 of those (ABX, NEM, GG, CAT, LECO) are not specifically in the business of mining for copper. The other 3 have extensive copper-mining operations around the world: Rio Tinto (RIO), Freeport McMoRan Copper & Gold (FCX) and Southern Copper (SCCO). The Table makes it evident that most of these are in the speculative range as an investment. In other words, you’d have to know when to buy shares and when to (quickly) sell. Lincoln Electric (LECO), however, appears to be an exception and worth considering as a long-term holding. It passes muster with respect to Total Return, Finance Value, BBA (projected 10-yr growth), Durable Competitive Advantage, LT debt/capitalization, FCF/div, and ROIC. (You can check out blogs from Week 43, Week 42, and Week 40 for more info on those metrics.) Were it not for its low dividend payout (1.4%), LECO would be a stock on the ITR Master List. 

Bottom Line: Mining companies are riskier investments than drilling companies, even the companies that mine copper and gold. Caveat emptor!

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