Why Should I Invest in Copper Stocks?

Investing in base metals or commodities has been a staple investment strategy for decades. Copper, lead, nickel, and zinc group together to form a classification known as base metals. Investors seeking opportunities tied to expected growth should focus on the best copper mining stocks in particular.

Given its broad use and growing demand, an investment in copper is often equated to an investment in growth.

Here’s a closer look into why you should invest in copper stocks in 2020 and beyond.

What does the Copper Market Look Like?

There are many companies that explore and mine for copper. It’s important to distinguish the best copper stocks to buy to safely diversify your portfolio.

There are major companies in the sector that are well-capitalized with decades of history, world-spanning operations, and slow and steady cash flow. Major copper mining companies have proven and probable reserves. They break down profit and cost on a given deposit by the ton, which makes them easy to evaluate and invest in if you want to buy copper stocks.

The junior mining copper companies are the exact opposite of copper mining majors. They tend to have little capital, short histories, and high hopes for huge returns in the future. However, they hold the potential of making a huge discovery and becoming the target of a merger or acquisition from a major company. Junior copper miners are attractive because as newer companies, their stocks tend to be cheaper. 

Many analysts advise investors to buy copper stocks from junior or mid-tier copper miners as they are cheap but hold the promise of great returns in case the company finds a large deposit. When this happens, juniors can return more in a few days than a major will return in years.

Although majors and juniors are very different, their business model is based on using up all the assets they have in the ground. The catch is that mining companies don't know exactly how much is in a given copper deposit until it is all dug up. For this reason, the value of a mining stock roughly follows the market value of its reserves, with a premium paid to companies with long histories of successfully bringing those reserves to market.

Another factor worth considering when you think about whether you should invest in copper stocks is the demand for the said metal.

Supply & Demand of Copper

The price of copper is driven by supply and demand. As one of the most useful industrial metals in the world, it has always been an item of interest for investors.

Even during times when the price of copper falls as a result of economic uncertainty and disruptions to the supply chain, the applications of copper remain diverse, driving demand.

A contributing factor to the demand for copper is the fact that China is the world’s biggest consumer of copper. It accounts for over 40% of global demand. The United States and the European Union follow, and India has emerged as the fourth largest global consumer of copper.

The industrial uses of copper span multiple sectors and applications, which means that even during economic slowdowns, demand continues to remain strong.

On the supply side, Chile is the world’s largest producer of copper, with China in second place. In 2014, Chile produced 5,750,000 tonnes of copper, nearly four times as much as China. There is currently enough production available to meet demand, but diminishing copper reserves recently started to push prices higher.

There have been several new copper discoveries in the past decade which have driven up the stock prices of the companies that made them. However, the grades and scope of each of these deposits have been significantly less than current supply. While economic, new supply is looking to be increasingly expensive to produce.

This indicates a strong case to be made to investors who are looking to buy copper stocks, such as Hot Chili Limited. When considering which are the best copper stocks to buy, always look towards companies with advanced exploration projects in politically stable regions. There are attractive targets for speculative resource investors and ways to diversify your portfolio with minimal risk.