Copper market and producers still look good even as prices fall 15% from record highs - Third Avenue Management
(Kitco News) - The copper market continues to struggle as prices fall further from their record highs three months ago. However, one fund manager said there is still an opportunity for the base metal to rally as Congress moves forward with its massive $3.5 trillion stimulus package.
Last week the Senate passed critical framework legislation to move the spending bill forward; however, the Senate's bill provided little support for the copper market, and prices have fallen below another support level. September high-grade copper futures last traded $4.14 per pound, down 1.50% on the day.
In a recent interview with Kitco News, Matthew Fine, portfolio manager at Third Avenue Management, said copper hadn't moved much because the latest moves on Capitol Hill only confirm expectations that the government is using the current pandemic to push forward its green energy initiatives.
"It was pretty clear some time ago that there was going to be an extraordinary amount of money spent on infrastructure, and we were just waiting for this confirmation," he said.
Although copper prices are more than 15% off their highs from May, Fine said that the market is still in good shape. It's only a matter of time before investors start paying attention to the growing demand for copper.
"We are looking for the next thing that is going to supercharge this market, and I expect that will continue to be growing demand for electric vehicles and the need for clean, renewable energy," he said.
Developed nations will need more copper as they upgrade their electrical grids as part of the global green energy transformation. At the same time, Fine said that emerging markets are also expected to see higher copper demand within the next few years.
"The world is growing fast, and less developed countries are at a stage in life where they're very copper intensive in order to build out their infrastructure and for electricity distribution. These nations are also consuming lots of copper," he said.
As bullish as Fine is on copper, he said that his firm continues to see more potential in the mining space. Copper producers are expected to see their margins grow because of higher copper prices.
The two mining companies Third Avenue is currently invested in are Capstone Mining Corp and Lundin Mining Corp. The two companies represent 10% of the firm's holdings.
"The balance sheets started out, at least in the case of the ones that we own, started out very, very respectable and have only gotten substantially better," he said.
While demand is expected to grow, Fine said that supply would continue to struggle to keep up; he added that investors would do well to look at producers with strong brownfield potential.
"The pipeline for new projects is extremely constrained. It takes a very, very long time to bring them to market. Forecasts would suggest that copper production is going to start shrinking after 2023," he said. "In this environment, margins can only get better from here for the producers. We have done extremely well on our copper investments."
As for when investment demand will pick up in the mining space, Fine said it is only a matter of time before investors see the value being created by mining companies.
"Miners are all in the habit of maintaining and retaining as much capital as they possibly can in anticipation of tougher times, but we're at a point in time where profits have been so strong that the balance sheets are better than they've ever been. Simultaneously there are very limited places for companies to spend on projects. Instead of companies deploying their extra capital, they are returning it to shareholders."