China's Rebound is Good News for Copper

• I consider both RIO and SRQ are very interesting if you're a long-term investor. They are at opposite ends of the market, RIO one of the worlds largest miners and Straits Resources SRQ a penny dreadful (.001c) but produces 30,000 tonnes of Cu annually, both have huge upside when the economy turns around and when copper prices increase Both haven fallen out of favor with investors and that's the kind of stock that I also like to buy!

Also posted on RIO thread.



China's Rebound is Good News for Copper
By
MIKE NORMAN

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| JUL 16, 2015 | 2:03 PM EDT
RIO



Does the Chinese stock market's apparent stabilization mean that copper is bottoming out, too?
A week or so ago, I talked about Chinese stocks' blistering rise in the over the last eight months. Yes, the Shanghai Composite index has given back some of those gains recently, but that's only after first rising by 118%. The index is still up over 70% from where it started.
In addition to those gains -- which many people discount, but I don't -- there's also the fact that the Chinese economy just posted better growth numbers than analysts had expected.
China's economy grew at a 7% clip in the second quarter, whereas most forecasts had growth coming in around 6.8% or lower. Factory output also surprised on the upside.
Why mention all of this? Because China is the world's largest copper consumer. China's economy and its growth play a huge part in copper demand -- and ultimately in its price, too.
As the chart below shows, copper has recently rebounded slightly from a two-month decline that saw it drop to a new low of $2.38 per pound for the September contract from $2.95 previously. That pullback had completely wiped out a four-month rally that had taken place from February to May.

Source: Barchart.com
But what's interesting is that you get a somewhat different picture when you look at the copper market's spreads. While copper prices have been in an established downtrend for the past four years, the chart below shows that market spreads haven't corroborated the recent plunge to new contract lows.

Source: Barchart.com
As the chart shows, the September-December copper spread hasn't fallen below its April lows. Instead, it's held relatively steady despite copper prices moving to new lows.
To me, this suggests that copper's outlook is moving to a more-neutral tone rather than the outright bearish view that's been in place until now.
One way to play an improving copper trend would be to buy stocks of mining companies that produce the metal.
The one at the top of my list is Rio Tinto (RIO), which is currently scraping along at around $40 a share -- a five-year low. RIO has a P/E of just under 12 and pays a $2.30-per-share dividend, which equates to 6% yield. Not bad!
Next up is BHP Billiton (BHP), which is also hitting five-year lows. The stock is trading around $40 per share, but has a P/E of just under 11 and pays a 6.5% dividend. That's even better than RIO.
Finally, I like Southern Copper (SCCO). This company has mines in Peru, Mexico, Argentina, Chile and Ecuador and is probably the purest copper play among the three stocks mentioned here. (The other two are more diversified into gold, aluminum, diamonds and a broad range of materials.)
Southern's chart looks a lot like the spread chart above for copper. The stock currently trades for around $29, giving it a P/E of 18 and a 1.4% dividend yield.
I think all three of these companies look pretty interesting if you're a long-term investor. They're profitable firms with good valuations, but they've fallen out of favor with investors. That's the kind of stock that I like to buy!