Copper Speculation Setting In

Within any bull market, there are surges and setbacks. Metals take turns rising and declining. Stocks take turns running and correcting.

Overall, it means that investors need to move with the ebb and flow to maximize entries and exits.

It’s harder than it sounds. When things are rising, it’s natural to want to jump in. When a stock or a metal steps back after a run, it’s easy to think you missed your chance and it’s now all over.

But if you believe we are in a metals bull market, then buying the dip is one of the best approaches.

Take copper right now. It ran hard from February to March then stepped back. Then it ran hard again from mid-April to mid-May.

Capstone Mining, a mid-tier copper producer, is a good example of how metal price moves like this play out in stocks. Here’s Capstone’s 6-month chart.

The larger gains by CS compared to copper is straight leverage. Capstone produces copper. Its cost to produce are fairly stable, especially over a short timeframe like this. When the price it gets for its product rises significantly against set costs, all those gains become profit. As such profits rises much faster than the metal price.

But leverage cuts both ways. As copper corrected 6.3% in the last few weeks, Capstone fell 17%.

Those are the opportunities that help. Obviously we all look at charts like this and wish we had bought six months ago. But that’s not helpful. What’s helpful is deciding whether you think copper will continue to rise from here. If you think it will and you want to add producer leverage to your portfolio, then a 17% correction in Capstone makes for a good entry point.

I’m not saying Buy Now! I don’t know if copper’s current correction is over; it might decline further. But if you want to own Capstone, I suggest waiting to see that copper has bottomed in this correction and using that dip to enter.

I use Capstone as an example but similar logic applies across the copper space right now…at least for producers.

Explorers are a different story. Explorers largely march to their own beat. Financings, free trade dates, drilling, anticipation of results, actual results, results from neighbouring properties, marketing efforts – there are a multitude of forces outside of the metal price that push junior company share prices around.

That doesn’t mean the metal doesn’t matter. Investors don’t bid up the price of a copper explorer ahead of drill results in a weak copper market. The fact that copper explorers are seeing share price gains right now as copper slides, even though for many results are still weeks if not months away, underlines how bullish investors are on copper.

Here are a few examples. Kodiak is currently drilling at MPD. Results are expected in a month, two months if labs get bad. And the copper price had been sliding for several weeks…yet over exactly those weeks this copper porphyry explorer has been catching a nice bid:

If you actually announce strong results into this copper-loving market, watch out. Filo Mining is the latest example. I am SO kicking myself for this one, as I saw the potential at Filo del Sol a year ago but wasn’t sure 4 how long it would take for them to hit into expansion results big enough to excite the market. Well, two weeks ago that’s exactly what they announced:

Painting with broad strokes, I would say the market is increasingly excited about copper. There’s been a lot of talk in the last bit about Goldman Sachs new report titled Copper: The New Oil. Goldman’s analysts conclude that the 2020s will be the strongest phase of volume growth in global copper demand in history. Given how much China’s copper consumption ramped up in the 2000s, it’s a strong claim. But it makes sense given demand growth from green energy. Wood Mackenzie did a nice job compiling copper supply against demand.

Goldman’s analysts have a similar model. If a glance makes it look like supply meets primary (base case) demand – look again. Most of the orange layers of supply are far from guaranteed. And without them, the supply gap is very significant.

Of course, there’s one answer to a supply gap: higher prices. That’s is exactly what Goldman predicts. For the market to produce the copper that the world needs, copper will have to average US$6.80 per lb in 2025.

Wow, right?

How to play the opportunity depends on you.

Producers will leverage the copper price. For better or worse explorers don’t offer leverage, up or down. And they are slow to the party: the copper price has been rising for a year but explorers didn’t benefit a lot until recently.

Why? Because exploration is risky and investors, in general, don’t bet on the risky end of the spectrum first. They start with the clear bets, producers like Capstone and First Quantum, and it’s only after (1) those have doled out lovely wins and (2) the copper bull market is undeniably established do investors start to think about speculating.

But we are there. And those robust fundamentals have speculators moving into copper explorers.

Seeing copper explorers rise, gently but assuredly, while the copper price steps back has me thinking that the speculator stage is getting started.

And that makes me want to bet on more copper explorers. I’ll start with the one below.

Before I get to that, let me note that there are three gold explorer stocks that I really like right now. In the vein of waiting for a dip, I focused on copper this week and will continue to watch for my best entry point on these gold stocks.

If you want to find out about these exciting new stocks, consider subscribing to the Maven Letter.