Investing in copper explorers, developers, or producers involves understanding the price volatility concerning the commodity. Global demand, influenced by the health of national economies, is part of the price equation. However, there are other things investors should consider when looking at copper.
Governments are increasingly flexing their muscles concerning copper operations in their jurisdictions. Rio Tinto plc (ADR) (NYSE:RIO) knows this full well. At its Oyu Tolgoi project (copper-gold)) in Mongolia, it is facing several issues with the Mongolian government. Oyu Tolgoi is one of the largest copper-gold deposits in the world. The expectation is that full production will occur here by 2021. There has been $1.1 billion paid in taxes and payments to the Mongolian government through to June of this year.
Mongolia owns 34% of Oyu Tolgoi. A Mining.com report (July 17; Frik Els) indicated: “Mongolia has long coveted a bigger slice of the mine and has twice in the past couple of years floated proposals to take majority control.”
The Government of Mongolia has numerous points of dispute with Rio Tinto. These include the amount of the original 2009 investment in the project, capital expenditures (capex), cost overruns, taxation, and more. The Oyu Tolgoi project embodies 30% of Mongolia’s gross domestic product (GDP).
Investors can note that Rio Tinto plc (ADR) (NYSE:RIO)‘s overall copper production increased during Q2 2013. Its strength is in a variety of copper projects in multiple jurisdictions (Australia, Chile, Indonesia, Mongolia, Papua New Guinea, Peru, South Africa, the U.S). Consequently, issues at Oyu Tolgoi are not going to bring Rio Tinto plc (ADR) (NYSE:RIO) to a standstill. Even with the political concerns of this project, Oyu Tolgoi did ship its first copper concentrate to China this month.
Rio Tinto’s overall strategy is to invest in low-cost, long-life, expandable operations. Its continuing goal is operational, productivity, and cost improvements.
Rio Tinto’s CEO noted in April: “My streamlined executive committee structure is now in place and demanding targets for 2013, including for cash cost savings, are locked into our performance measures. We are making good progress in achieving our cost-reduction targets and other priorities for 2013, and are determined in our pursuit of greater value for shareholders.”
Inherent dangers that affect production capabilities
Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) is one of the world’s leading producers of copper concentrate. PT Freeport Indonesia, its affiliate, produces copper concentrate in Papua, Indonesia (the Grasberg mine). The company is working on building up output at this mine following a May accident. There were 28 casualties and 10 injuries because of this accident.
Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) has noted that its costs in Indonesia are fixed. Consequently, the company incurred these costs even though the Grasberg mine was shutdown due to the accident. Investors should consider whether a company has the resources to rebound and have sustainable production capabilities after such tragedies in a specific jurisdiction. The inherent dangers in mining are a constant threat to employees and corporate operations.
For Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX), open-pit and mill operations started up again on June 24. Its underground mining operations started again on July 9. Investors should consider that the mine will probably only produce 80% of its targeted output for this year (500,000 tonnes of copper; 1.2 million ounces of gold).
In addition to this, the company’s copper-price realization for Q2 2013 was $3.17 per pound. This was less than Q2 2012 at $3.53 per pound. Investors should take into account production stoppages, fixed costs and the market price of copper as they perform due diligence.
Industrial production outlook
Global industrial production has considerable impact on copper (price) and copper companies’ fortunes. According to BMO Global Asset Management (Market Perspectives: January; 2013 and 2014 Market Outlook), the firm expects for 2013: “Modest global economic growth that will include [a] recession in Europe, slow growth in the U.S., slower growth in China, and solid strength from many emerging market economies.”
Its Escondida mine in Chile produces copper concentrate and copper cathode.Copper smelters use copper concentrate.Copper cathode is the foundation product of copper for high-grade applications (telecommunication cables, automotive heat-exchangers, circuit connectors, electrical devices, transformer strips, etc.).
Robust worldwide industrial production is vital to BHP Billiton Limited (ADR) (NYSE:BHP), which provides copper concentrate and cathode for these production processes.
BHP Billiton is focusing on its larger, majority-owned assets to provide greater return for the company and shareholders. It is selling its Point Valley copper mine/railway in Arizona to Capstone Mining. It will realize $650 million from this sale. The company is realizing significant transaction value from divestitures. From April 2012 to this past April, it realized $5.0 billion.
Investors should note the company’s commitment to major operations and the additions to its treasury from selling off projects no longer part of its overall corporate strategy. Investors can take away that management has a strategic plan for their copper portfolio and how it can best move BHP Billiton forward.
Joint ventures (JVs) can portend further growth for entities involved. The aforementioned Grasberg mine in Indonesia is a JV project.
Rio Tinto has a joint venture with Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) in Grasberg. This is for a 40% share of production above specific levels until 2021. This JV also involves a 40% share of all production after 2021. Important for investors is the potential for success for these companies at Grasberg because of their combined resources.
Concerning its overall operations,Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) has increased its copper production for the three months ended June 30 compared to the same period in 2012. It produced 909 million recoverable pounds of copper versus 887 for the same period last year (six months ended June 30; 1,889 versus 1,720 for the six months ended June 30, 2012).
Rio Tinto, for its operations as a whole, has a program in place to reduce its exploration and evaluation expenditures by $750 million for 2013.
Will I invest in any of the above?
I may; my personal pick is Rio Tinto. I like its focus in allocating capital expenditures to the highest return projects, and its efforts at cost containment. Cost control is vital to sustainable operations. Investors should consider mining companies with a commitment to keeping expenses reined in.
The article Investing in Copper? A Few Things to Consider originally appeared on Fool.com is written by Michael Ugulini.
Michael Ugulini has no position in any stocks mentioned. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. Michael is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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