A Profit Rx From Dr. Copper

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Over the last few weeks, we’ve talked a lot about the “yellow metal” (gold) and the “white metal” (silver).

A lot of folks refer to the red metal as “Dr. Copper” – believing that price trends are a good indication of the health of the global economy.

But there’s a surprising twist to this story – and investors who are in on this “secret” stand to make a nice profit.

And we’re going to let you in on this secret.

“It’s like this, Bill,” Peter, who specializes in metals investing in his Global Resource Alert trading service, told me during our private briefing late last week. “Copper has terrific inherent properties: It’s highly malleable, it resists corrosion, and it acts as a great conductor of both electricity and heat. Plus, it’s relatively inexpensive.”

The upshot, Peter explained, is that “copper is essential to building construction, power generation and transmission, electronics, machinery, and even vehicles. The typical automobile contains nearly one mile of copper wire, while some hybrids need up to 99 pounds of copper.”

All of this is pretty widely known – so much so, in fact, that investors believe that copper prices and the health of the global economy are essentially two sides of the same coin:

If copper prices are rising, that must mean the global economy is doing well.
And, conversely, if the global economy is weak, that must mean that copper prices are headed for a fall.
Unfortunately, the global economy isn’t looking all that hot right now. In fact, as the Global and Mail newspaper and Money Morning‘s Private Briefing both recently reported:

World factory output slowed last month, primarily due to worries about the rising debt loads being carried by the United States and the Eurozone.
Canada‘s economy contracted during the second quarter – the first time that’s happened since the recession.
China, the world’s No. 1 consumer of copper, is experiencing an economic slowdown; new export orders fell in August – the first time that’s happened in two years.
The U.S. Labor Department announced Friday that the U.S. economy added no new jobs in August.
As a result, stock markets around the world were pounded on Monday, with debt worries and concerns of a “double-dip” U.S. recession being cited as the key catalysts.
That brings us to the “twist” in our global-investing tale.

Clearly, the near-unanimous view is that the global economy is currently sputtering, and may even stumble. So it goes without saying that most investors don’t want to be long copper right now.

And yet, despite the dour outlook most investors have for the global economy, copper prices have remained strong, Peter says. That means that copper is a “must-add” portfolio play – with a huge long-term upside.

Copper closed Monday at $4.06 a pound. At that price, copper remains highly profitable for miners to extract and process.

It actually averaged about $4.20 a pound in August, according to Bloomberg LLP.

That’s not far below the record high of $4.60 a pound it established six months ago. And it’s a price that keeps mining companies fat, happy – and profitable.

Peter has facts that support this view. For instance:

Copper was already in short supply globally – now strikes at some of the world’s top mines are supporting “red metal” prices.
When copper prices hit an eight-month low of $3.83 a pound in early August, China reportedly stepped up its purchases of the “red metal” – something that’s continued to this day.
While the higher prices will prompt miners to increase output, a lot of that increase will come from existing operations that were curtailed during the global financial crisis. To really meet growing demand, all new mines are needed. But the discovery, permitting and financing of those new copper mines won’t be a picnic.
Goldman Sachs Group Inc. (NYSE: GS) – which says it remains “very bullish” on copper – sees supply disruptions that will impact about 8% of global production this year. That will boost short-term copper prices.
Indeed, regular supply disruptions and delays in new projects will work against earlier forecasts that copper prices would drop all the way to $3 a pound by 2015. And China’s huge size – and huge appetite for commodities – will keep a floor under copper prices.
“Bill, a report from the International Copper Study Group says that demand for copper for all of this year will exceed global production growth by a wide margin,” he explained. “Last year, the annual production deficit for refined copper was roughly 250,000 metric tons. This year, it’s expected to balloon by 52% to 380,000 metric tons. And Standard Bank Group thinks we could see a deficit next year of 562,000 tons.”

So how do you profit from this?

Obviously, you can travel the exchange-traded fund (ETF)/exchange-traded note (ETN) route. Some of the copper funds include:

The iPath Dow Jones-UBS Copper Sub-Index Total Return ETN (NYSE: JJC), which is the”cleanest” copper-tracking fund on the market. This futures-based fund has an expense ratio of 0.75% and a tracking error of 0.57%.
The First Trust ISE Global Copper Index Fund (Nasdaq: CU), which invests in the stocks of companies that mine copper and other metals, too. Its expense ratio is 0.70% and its tracking error 0.61%.
The Global X Copper Miners ETF (NYSE: COPX), which tracks the Solactive Global Copper Miners Index, which consists solely of pure copper-mining stocks. It has an expense ratio of 0.65%.
Peter’s copper-stock recommendation might surprise you: It’s Barrick Gold Corp. (NYSE: ABX) - which, as its name implies, is a major gold miner.

In fact, Barrick is the world’s largest gold producer.

So why is Peter recommending it as a copper stock? That’s simple. Earlier this year, Barrick announced that it was buying copper-producer Equinox Minerals Ltd., in a deal that was valued at $7.7 billion. The deal closed in late July.

With the acquisition of Equinox, Barrick – which relies on gold for 80% of its revenue -expands its business in copper, adding to the company’s interests in Chile.

Barrick shares closed yesterday (Tuesday) at $53.59.

“It’s very rare that assets like this come on the market,” Barrick Chief Executive Officer Aaron Regent said when the deal was announced. “If you look at the top 20 mines in the world, this is the only one that’s actually available.”

Concluded Peter: “You know, Bill, it’s like this: If one of the biggest miners in the world sees fit to invest nearly $8 billion in copper – and views it as such a scarce resource – it stands to reason that we should look to do the same.”