Cu now: A Play on Copper?

[Geremy Farr-Wharton]

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So, I’m usually an advocate for investing in your circle of competency. That said, this year, I’m all about breaking the status quo (just to take some lessons from Apple’s playbook!).

Australian Copper – there are massive supply build ups have occurred globally (we’ve seen similar occurrences with other metals as well – iron ore, lithium etc).

Back in the Selfwealth live days (remember those good ol days!), CXO always used to pop up on the top traded list and it has fallen from its heightened grace. There are a bunch of reasons for this, so I was thinking was it a good time to invest with a lithium play. Australian Lithium is expensive and it’s hard to compete with other lithium mines (extraction) in other places. There are also potential alternatives to lithium (e.g. for batteries) in the future that may hit the market for a longer term play (10+ years). So lithium is out for me.

Copper… there aren’t new deposits being identified in Australia (although obviously Aus isn’t the only place there are deposits!). So while there are plenty of supplies now, it is a base metal and those supplies will run down at some point. So is now a good time to ‘investigate’ ASX copper stocks (a play from Buffet’s handbook (or was it Munger’s) – buy when everyone is afraid to, sell when everyone is hot … to paraphrase)?

Anyway, I’m keen to get other people’s thoughts on this. Especially your’s @Kevin! You seem to know resources, and I know it’s not directly in Owen’s circle of competence.

[Owen Raszkiewicz]

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It’s definitely not in my circle of competence, as you say mate. However, I would ask you, “what are your intentions?” 😉

At the end of the day, all investing can be boiled down into 3 ‘factors’:

1. Growth

2. Income

3. Risk

Without boring all of us to death with shady academic research, it comes back to why you are making a copper play.

For example, is it growth? If so, is technology or healthcare a better growth driver, once you consider the level of risk? (i.e. circle of competence)

Is it income? If you’re seeking income, is a dividend ETF like VHY able to offer a superior level of income per unit of risk? (e.g. downside risk)

Is it to lower risk through an uncorrelated position? Maybe you think you can buy into copper and it’ll behave differently to your existing ASX 200 stocks (i.e. lower the portfolio’s correlation)? If so, would overseas stocks, a smaller position in a gold ETF + the remainder in some other growth position be superior from a risk perspective?

I’m not suggesting copper is a bad move. But rather providing a framework from which to ‘analyse’ anything you (or anyone) would plan to invest in with your capital.

Kev and I call this the principle of best expression. Before investing in anything (e.g. VAS) we ask ourselves ‘is this the best expression of what we’re trying to capture?’ Oftentimes, before jumping straight into VAS, you end up considering ideas like Soul Patts (more private market assets), MVW (equal weight), EX20 (fewer banks), VHY (more income, same risk), etc.

On Copper

The industry data I’ve seen would suggest Copper will probably be one of the best commodities to be exposed to in late 2020s / early 2030s. Hence why BHP bought Oz Minerals.

Arguably, BHP is now the best way to get exposure copper in Australia – it now has huge resources from Oz, combined with its existing Olympic Dam infrastructure (currently used for iron ore). However, it’s obviously not a ‘pure play’, with a lot of revenue from iron ore, coal, etc.

A) Have you looked at BHP?

B) Have you watched our recording from last year with BHP?

 

Great topic, by the way.

 

[slt]

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👋, dropped off the notification list for new posts so have been absent from forum.Am one who has bought a few mining stocks with mixed outcomes.  With hindsight, I’d conclude my purchases were not based on any circle of competence.  Bought based on some analyst opinions and general news about commodity supply/demand similar to what Geremy has posted…I.e anyone who reads the news will know the same info, so I have no advantage.
Reason – largely specualtion.  No framework applied.

Did well on some and terribly on others. I’ll share some of my thoughts

1/ Commodities are price takers. Share price depends on commodity price.  This is cyclical.   Except maybe for gold- price of the precious metal up, but most big miners share price down
2/ Most mining companies have no moat as there are multiple producers around the world.  Costs of production and scale  can be a source of narrow moat if lowest cost producer. New supply (cheaply produced) can come on suddenly e.g. Nickel from Indonesia

3/ When supply restricted and price goes up, all companies pile in, bring on supply which brings price down. Mining explorers are often “penny stocks <$1.00 whose price can swing wildly and look like potential for multi-bagger returns. mining exploration is very different from profitable production . Like the small biotech start up with promising new drug but 10 years of trials to go +TGA/ FDA approval

We’ve had Lithium mania, Uranium go nuclear and now Copper looks shiny

4/ The copper supply shortage has been discussed for over 1 yr.  yet the copper price remains low/flat.  Highly reliant on demand from China

5/ Mining stocks can be rewarding for both
– dividends – FMG/BHP/RIO in the past but this depends in future commodity price and costs of production. I suspect this may have peaked
– share price growth- this is cyclical and momentum driven. Need to know when to get out.

[Jas B]

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Ripper topic…

I’m copper bullish myself….its in my industry.

We lock in cu by the tonnage and about to lock in more due to a rise around 6% in the short term.

Depends what type of play you are after?

You can ETF it with somehting like WIRE…or pick WIRE apart and see what it actually holds…..think BHP, Glencore…..(Not a fan of thematic ETF’s personally).

Or you can lean off the edge of a cliff with Owen holding you by your shirt…..and go somthing like MEI, HMX or HCH…(Just naming them…dont jump the gun and bet your house on them).

FWIW I was lucky and did ok on MEI and sold out…HMX I have been in for a while since 2020….HCH I dont own and never have.

• This reply was modified 1 month ago by Jas B.

[Geremy Farr-Wharton]

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All hugely interesting answers. As always, Owen was the sounding board I needed.

All responses took me back to BHP (inluding on the moat aspect! thanks slt), which is where I was originally looking anyway… but already have significant exposure in to BHP in VAS and I don’t want to increase that with a direct investment (although I’m tempted!), as it is already big enough.

Food for thought!

I think my head keeps jumping around microcaps that IPO – WA1 still amazes me… Honestly, I can not understand its journey!

Thanks everyone!

[slt]

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Hi again,
Quick squiz at the above tickers… all non-profitable exploration companies burning cash until they find the mother lode. Haven’t looked in detail at the WA1 IPO, but I’d be wary of the pump and dump, talk up by the broker who gets paid regardless of what the share price does.
Below is what  I   didbuy and what I think I’ll do next. NB These are short descriptors and I did do a bit more research. However, this could still be a useful insight for others into (flawed) frameworks and decision making…..
1/ FMG – iron ore price stayed up despite naysayers. Although China property market not doing so well, they bought iron ore to build alot of EVs!  Juicy dividend yield. Twiggy is very charismatic and hydrogen narrative compelling. I’ve since sold as I released that FMG is single commodity only and has higher costs of production than other iron ore miners. I think Iron ore price will continue to decline in the future. Held for 2years with CG of 4.6% and DY of 13.6%. So a good outcome

2/ IGO – diversified “future metals”. Paid reasonable dividend and good growth potential with the battery narrative. Joint ownership of Greenbushes lithium mine- one of the biggest in the world. Trialling downstream processing of ore to LiOH which is more valuable. This was not cost efficient so no profits from this. They bought another nickel miner, probably for too much and then Indonesia flooded market with cheap Nickel. So double whammy of Li and Ni prices dropping. I still hold…. Rode the share price up 21% gain…. And then all the way down – 24% loss because I wasn’t paying attention to commodity price news. Still holding…. Ni and Li prices seem to have bottomed out, possibly in a short term up trend now

3/ AIS – based on Cu supply shortage story. Outcome- similar to IGO price up, then down -60%.
Their cost of production is now higher than the Cu price and AIS losing money. Capital raise in Dec last year was undersubscribed. They have also taken out a loan so highly leveraged. I still hold with a glimmer of hope as WHSP are stakeholders and Rob Millner is a board director. Am trusting that SOL interest is an indicator that there is still some long term value growth somewhere in the future.

4/NCM – taken over by NEM-one of the worlds largest gold miners.
Bought because I was bullish on gold. I already own a gold ETF which did its job of reducing volatility and diversifying as an uncorrelated asset class during Covid times and beyond. Thought Australia’s biggest miner would add to portfolio diversification and also paid a dividend. NCM price was volatile-Gold ETF much less so. The smaller gold miners e.g. RMS, WGX,NST have performed better as they have lower costs of production. NCM Price went up with takeover bid. However, NEM price has since gone down. Thesis has not played out so I will be selling and cut losses soon. Stick to holding the Gold ETF for uncorrelated diversification.

Overall, I have drawn the conclusion that investing in individual smaller mining stocks does NOT suit a “buy and hold” strategy. Dividend returns can be lucrative, but being cyclical are not consistent. They are OK to trade over medium timeframe of months to years. One needs to buy off cyclical low for adequate margin of safety.  You only know it was the low with the benefit of hindsight.

If you want to play in IPO/ exploration land- be ready to lose everything. Using technical analysis momentum trading strategies may mitigate losses and identify big winners. But this is an entire skills set and framework that needs to be learnt. Monitoring of share & commodity price momentum is required. Position sizing  and having sell rules is critical. My purchases were all <1% of total portfolio…. now < 0.5% mainly because of capital loss incurred  and no sell criteria 😂

A commodity ETF such as WIRE (global X) is more diversified and less volatile. Not sure if WIRE would outperform a passive index ETF though. COPX is the US listed version which has been around for longer and has more data for comparison.

The big mining companies you get in an index. The smaller ones can be more cost efficient, but its difficult to ascertain this without detailed industry knowledge or good analysis…. I like Gaurav Sodhi from Intelligent Investor & weekly (free) newsletter from Luke Laretive from Seneca financial. Carl Capolingua is a technical analysis trader who writes for Livewire. Morningstar also good for the bigger miners.

I find the sector interesting to read about given how dependant AU economy is on mining. However, the risk/ return/ effort spectrum required to invest in individual companies in this sector is less compelling to me these days.

A more interesting sector is the mining, (+ oil & gas) services sector, especially if providing specialised infotech type services to commodities providers. For interest, research RUL and DUG. While still subject to some cyclicality, they are businesses that provide mission critical services to the miners. They can often scale without increasing costs so have more long term growth potential.

[Geremy Farr-Wharton]

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Thanks for the follow up, slt and for the candid and insightful points you’ve raised.

very very interesting! I really appreciate it!

I concur, unless it is a straight up bet, I can’t see a world where this kind of approach is compelling longer term and certainly doesn’t suit a buy hold (long term) strategy.

Still. I’d love to get an IPO that grows 3000% in 3 years (the dream). That’s the 0.1% [gamble].

 

[slt]

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You could put 0.1% of your net wealth on Red @the Roulette table instead? (Def not Financial advice…..😀).
One of my goals is to drink less Narrativium, that way I don’t have to breath  Hopium for years waiting for a share price recovery.

A couple of  Morningstar articles below. NB links are via my paid subs, but you should be able to search the titles vai their free website to read too.

https://premium.morningstar.com.au/news/article/245368/lessons-from-the-battery-metals-bust

https://premium.morningstar.com.au/news/article/247373/electric-vehicles-not-so-bullish-for-copper

• This reply was modified 4 weeks, 1 day ago by slt.

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