July 4, 2014 / 1:06 PM / 6 years ago

After slide, fund managers see value in copper miners

* Some of big funds have increased exposure to copper

* Copper market seen tilting into deficit from 2016

* Lack of investment to feed next boom-analysts

By Silvia Antonioli

LONDON, July 4 (Reuters) - Some fund managers are increasing exposure to copper mining companies, betting the industry has reached the bottom of a downturn and that shares offer value for money.

Copper has lost almost a third of its value from a peak in 2011 due to a slowdown in top metals consumer China, which buys about 40 percent of global output.

Copper miners’ shares represented by the Thomson Reuters GFMS pure-play copper companies index fell by almost 40 percent over the same period.

Historically the shares move more sharply than the metal price and they currently look fairly priced compared with the metal, data from metals consultancy Thomson Reuters GFMS shows.

This offers an attractive entry opportunity for investors with a 2-5 year view because copper’s fundamentals are expected to improve in the medium term.

Data from Morningstar shows that some of the largest natural resources funds, including JPM Natural Resources and BGF World mining, have already increased their exposure to copper companies in the last few months.

“Any investor with a longer-term horizon, ready to bear some volatility, should see the next 12 months as an opportunity to pick up copper companies, since starting from 2016 the market should be tightening up,” George Cheveley, natural resources portfolio manager at Investec, said.

Cheveley suggested diversified miners with good copper exposure such as BHP Billiton and Glencore for a defensive play or First Quantum, Southern Copper or Grupo Mexico for a higher-risk exposure to copper.

Canadian miner First Quantum is investing in projects in Zambia and Panama hoping to almost treble its copper production by 2018, to become one of the world’s largest producers.

Pioneer Investments said it has been increasing exposure to copper versus diversified miners in the last few months, buying shares in Swedish copper and zinc miner and smelter Boliden which unlike most copper miners is only present in low-risk OECD countries. This stock is now a significant holding in some of the company’s key European funds, Pioneer said.

“Investing in diversified players clearly gives some diversification of risk but usually a lot of exposure to iron ore which faces some challenges. We tend to prefer clean (copper companies) plays,” a spokesman for the company said.

Iron ore prices are expected to decline in the next few years as major suppliers flood the market with extra output which analysts think will more than meet demand.


Unlike the early 2000s boom, driven by demand from China and other emerging markets, the next copper price upswing will be triggered by tighter supply, with the copper market predicted to tilt into deficit from 2016, according to Ernst & Young.

Shareholders have forced big mining groups to cut or delay investment in new projects and return more cash instead after years of unruly expansion resulted in hefty writedowns. Rio Tinto, for example, is planning to cut spending to $8 billion in 2015 from about $14 billion last year.

There have also been fewer major copper discoveries which are economical to mine as well as rising production costs and falling ore grades.

“The lack of investment interest in new mining projects is sowing the seeds of the next supply shortage, and hence the next boom, that will take place merely because there is not enough supply,” Ernst & Young global mining and metals leader, Mike Elliott said. “We think in late 2016 the copper shortage will start to bite and prices are going to have to rise to attract new mine development but that’s not so easy. You can’t just turn on the tap.”

GFMS calculated the capital cost to bring on stream one tonne of new copper production has risen by 13 percent in the last year and reckons the incentive price to attract new investment is roughly $7,478 per tonne. The current copper price falls short of that at about $7,140.


Despite a recovery in the last few weeks copper prices are down about 4 percent this year, lagging all base metals but lead . Uncertainty about economic growth and credit availability in China have created doubts about the country’s ability to digest copper at last year’s rate of about 9 percent.

Yet China’s acquisition of Glencore’s Peruvian mine Las Bambas this year for $6 billion shows Beijing still sees copper, used in power and construction, as important for growth.

In the meantime, other large projects are being delayed by environmental issues, lack of power and infrastructure and political risk. .

The expansion of the Oyu Tolgoi mine in Mongolia, for example, has been put on hold due to disagreements between the government and Rio Tinto’s Turquoise Hill, the company developing the project.

Even if copper prices remain stable, low-cost copper companies with solid finances and growth prospects represent a good investment, fund managers said.

“This isn’t about very strong copper prices. This is a bottom of the cycle trade and it’s a value trade, BlackRock commodities strategist Nick Moore said, adding that on a 3-5 year view copper was his top pick in natural resources.

“As we go into the second part of the year this may be the right time to pull the trigger.”

Glencore, for example, is currently trading at a 10 percent discount to the mining sector compared with a 13 percent premium in November based on its 12-month forward price to earnings multiple, according to Thomson Reuters data.

Blackrock’s BGF World Mining Fund has over 20 percent exposure to copper companies. It owns shares among others in First Quantum, Southern Copper and also Antofagasta whose shares are down 50 percent from a late 2010 peak. (Additional reporting by Francesco Canepa. Editing by Tom Pfeiffer, Elaine Hardcastle and Jane Merriman)

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