The price of copper has been on a steady rise, and this upward trend may have positive implications for mining stocks. After hitting a multimonth low of $3.56 in mid-October, copper has surged by just over 8% to reach $3.87 per pound. This increase is largely attributed to the resilient state of the economy, leading market players to anticipate a surge in demand for copper from auto makers, consumer-goods manufacturers, and other industries. Additionally, with inflation rates experiencing a significant drop from their peak levels, there is a possibility that the Federal Reserve might lower interest rates. Furthermore, China, a major consumer of copper, is injecting approximately $140 billion into its economy through monetary stimulus measures.
However, now is the crucial moment for copper to either prove its mettle or succumb to pressure. Currently approaching the low-to-mid $3.90s, this price range has been a stumbling block for copper in recent months. A break above this resistance level would signal increased market confidence in the economic outlook and potentially push prices toward the $4.20 mark, a level that was briefly reached in January 2023.
Described by Evercore strategist Julian Emanuel as a commodity closely tied to China, copper is presently testing the limits of a 'coil' that has been developing over the past year.
Should copper manage to surpass the $4 threshold, mining stocks would undoubtedly reap the rewards of this surge.
In conclusion, copper's recent price rally has garnered attention in the market. The potential breakout could have far-reaching implications not only for the metal itself but also for mining stocks. Eyes are now firmly set on whether copper can break through its current resistance levels and establish a new high. All signs point to an increasingly optimistic economic outlook as demand for copper rises among several industries. With the Federal Reserve potentially lowering interest rates and China injecting monetary stimulus into its economy, the stage is set for copper to prove its resilience and potentially reach new heights.
Copper Companies Set to Benefit from Rising Prices and Demand
Copper companies face challenges when copper prices are low and demand is weak due to their high fixed costs. However, when copper prices rise, these companies can expect higher profits. With the recent surge in copper prices and increasing demand, copper companies like Freeport-McMoRan and Southern Copper have seen significant stock gains since mid-October, with Freeport up by 17% and Southern up by 20%.
Among these companies, Freeport appears to be the more promising option. Southern Copper's third-quarter earnings report didn't provide clear information about the volumes of metal it can sell this year, making it difficult to make accurate projections. In contrast, Freeport expressed no such uncertainty. In its fourth-quarter release, the management confirmed that they would sell 4.1 billion pounds of copper in both 2023 and 2024. Assuming the copper price increases by 8% to reach $4.20, this year's sales would see a comparable rise, aligning with the current consensus analyst estimate of $23.56 billion in revenue.
The potential boost in earnings is also worth considering. Analysts currently predict Freeport to earn $1.61 per share in 2023. However, considering the current margins and keeping wage inflation in check, the company has the potential to earn closer to $2 per share. If we look at historical data when copper was trading at $4.20 in January 2023, Freeport's stock was at $45, showing a 13% increase from the current $40.
With rising copper prices, Freeport is poised for even more gains in the near future.
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