How to Make 140% in Copper Stocks Even If Prices Drop
By Matt Badiali
July 6, 2007

Copper is the king of base metals.

Used in plumbing, wiring, cars, and appliances, copper is all around you. The world consumed 17.4 million tons of it last year. And despite rising 180% in the past three years and 385% in the past five, I think copper producers are still great investments...

The thing is, most investors aren’t interested in base metals right now.

I regularly speak with commodity analysts and brokers. Almost to a man, they're focused on precious metals because their clients want to use gold as insurance against an economic downturn.

On the other hand, investors have absolutely no confidence in the fundamentals of copper and the other base metals right now. "Don't you know Chinese consumption is set to collapse?" is one of the most commonly expressed concerns about putting money into copper.

But, here’s the catch: Short of an all-out collapse in copper prices, a decline in copper won’t hurt miners... We only have to look as far as the S&A Gold Report portfolio for proof. About a year ago, we added shares of Southern Copper (PCU) to our portfolio. Despite a 5% decline in copper since then, PCU has gained over 140%. Another of our copper plays is up nearly 50% in just six months.

And in the May 18 edition, I showed you how gold producers that also produce copper outperformed their pure-gold peers by about 20%.

Here’s why: Right now, these copper miners are like oil companies after oil went from $14 to $50 per barrel. Everyone was so focused on what prices would do that they forgot oil companies were making money with oil at $14 a barrel. They were making a whole lot more money at $50 a barrel. And profits are simply ridiculous when oil is over $70.

In the same way, copper and base metals prices are so high, miners are laughing all the way to the bank. So if copper prices drop from here, they’ll still make plenty of money.

But even if the copper bears are right, I don’t believe copper prices will fall too far. The demand simply won’t allow it.

Consider that anything electronic needs copper. Nearly everything we buy these days interfaces with a computer or takes a picture. And the largest demand by far comes from new electrical infrastructure, such as power lines and power plants.

However, demand is only one side of the equation.

In the past, the copper market was not very tight. Our excess supplies more than met demand. However, that excess is gone now, as you can see from the London Metal Exchange warehouse supply chart.

London Metal Exchange Copper Supply

But even so, buying a copper stock doesn’t have to be a play on strong copper prices...

Copper is around $3.60 a pound right now, and the price has fluctuated between $2 and $4 for the last 16 months. Sure, a slowdown in global growth could send copper prices below $3 again. But if you can buy a great copper company for a good price, you can still make a fortune here.

Good investing,

Matt Badiali