Are Any Copper Stocks Worth the Risk?

The price of copper is down 25% since the start of the year, and recently fell to a six-year low amid escalating concerns of slowing economic growth in key emerging markets like China. China is likely to grow its economy at the slowest rate in the past 25 years, which has stirred a panic in investors, who have responded by selling commodities indiscriminately this year.
Not surprisingly, the major copper mining stocks have been hit equally hard. For example, Freeport McMoRan (NYSE: FCX) and Glencore PLC (OTC: GLNCY) have each lost approximately 75% of their value over the past year.
For investors willing to take the risk, copper stocks may rebound if the underlying price of copper can simply find a floor. How long that takes is anyone’s guess, but one copper stock could be an attractive turnaround play.

Economics of Copper Remain Weak

The collapse in the price of copper has had a disastrous effect on the copper miners. Freeport McMoRan lost $8.1 billion over the first nine months of 2015. The company earned a $1.5 billion profit in the same period last year.
As a commodity, copper prices are a function of supply and demand. Along with other commodities that have crashed this year, like oil, copper is falling because of a global supply glut. Several years ago, mining companies ramped up production as prices rose. Eventually, high prices curtailed demand. Now, too much supply is saturating the market and prices are falling.
Demand for commodities is highly correlated with economic growth. Copper is a key input for industrial and construction companies. From 2009 to 2011, the price of copper rose steadily, due largely to the global economic recovery from the financial crisis. As economic growth slows in premier emerging markets like China, it is having an enormous negative effect on the price of copper.
Fears of contracting economic growth in China are rising. Economic data points like the Purchaser’s Manufacturing Index, or PMI, are not meeting expectations, and that has signaled a slowdown in economic activity. In response, the Chinese central bank recently announced a new round of monetary easing measures designed to boost the economy, including lowering the interest rates on the loans it gives to banks.

Are There Any Copper Stocks Worth Buying?

As I mentioned, it is impossible to predict if, and when, copper prices will recover. But for Freeport McMoRan, the good news is that it at least operates a diversified business.
In 2013, Freeport made two huge acquisitions, buying Plains Exploration & Production and McMoRan Exploration for a total of $19 billion. These acquisitions added a massive portfolio of oil and gas assets to its operations. Freeport immediately gained access to some of the most promising fields in the country, such as onshore plays like the Haynesville natural gas shale, as well as in the deep-water Gulf of Mexico.
If the price of oil recovers before copper, Freeport will be a major beneficiary. That might not be far-fetched, since oil prices are not as vulnerable as copper to a downturn in the Chinese economy. Therefore, at the very least, Freeport offers diversification.
From a yield standpoint, both Glencore and Freeport are interesting options. Glencore sports a double-digit yield, but such a high yield is a red flag that the dividend may not be sustainable. For its part, Freeport distributes only $0.20 per share annually, but since the stock has been so badly beaten down, it provides a decent 2.4% yield.
While the copper stocks are extremely risky bets, Freeport in particular could reward investors handsomely if copper prices rise again.
But if betting on a copper rebound is too dicey for your risk tolerance, click here for a select group of stocks that have proved to be resilient when times are tough.