Copper – How To Invest

Direct Investment

Physical Proxys

Holding physical copper is possible, however the long term cost of storage and transaction costs would likely outstrip the potential gain from appreciation given the low relative value (compared to, for instance, gold or platinum). It is also highly impractical for private investors to use this method.

Derivatives / ETNs and ETCs

The main way to gain “direct” exposure to copper is via linear derivatives (e.g. futures, which is also not ideal for private investors and would still not provide exposure to the spot price of copper), and Exchange Traded Commodities (ETCs) or Exchange Traded Notes (ETNs), which replicate the price of copper futures.

The main drawbacks of linear derivatives, and the ETNs/ETCs based on them, are basis risks and roll losses on the futures curve, and the latter can be very material over the long term.

Options (e.g., long-dated deep in-the-money calls used as equity proxies) can leverage the use of capital compared to owning stocks outright and with relatively little increase in comparative financial exposure. These would also have an asymmetric response to the price of the underlying moving favourably which some sophisticated investors prefer. However, as a wasting asset it is necessary not only to be correct in direction, but correct sufficiently to offset the costs, and within the necessary timeframe, making options less suitable for long-term holdings.

Indirect Investment

Stock ETFs

Similarly to other commodity related themes, due to the intrinsic financial and operating leverage of copper mining companies (producers, developers, and explorers), the share prices of the companies primarily exposed to copper could, and have in the past, increased many multiples of the copper price increase – which is also the case on the downside. Stocks also suffer from idiosyncratic risk, therefore, a ‘diversified’ basket of copper companies, gained via a stock ETF, should give outsides returns in a copper bull market.

The main drawback of investing in copper mining ETFs, which are heavily weighted to the largest capitalisation companies, is that most large copper mining companies tend to produce other minerals, e.g. iron ore and/or coal, whose price is independent from the price of copper outside of a general macroeconomic commodity price rise or economic downturn. Therefore, in most cases, the return from investing in copper stock ETFs would not be considered a good pure play exposure to the price of copper.

Individual Stocks

Investing in individual stocks offers both operational leverage to the price of the underlying commodity and the ability to focus on those holdings whose exposure is mainly towards copper, with lower exposure to other minerals. It is also possible to adjust operating and financial leverage to change the aggrecate risk level of a portfolio constructed of specific stocks.

In our stock section we highlight those companies which we believe have the purest exposure towards copper. It should be noted that in most cases these are medium to small cap stocks, which are typically intrinsically riskier than their large cap counterparts.

Stocks range from early stage projects to larger well-established companies with a proven track record and reserves. Needless to say that the idiosyncratic risk of earlier stage stocks is significantly higher due to the potential for either setbacks but also positive surprises.

Last updated: Jul 30, 2022

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