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Three Ways to Invest in Copper

April 15, 2009 at 10:03 by Mario

Copper prices have been on a tear this year, as Chinese demand for the metal — both for stockpiling for future use and loading factories to satisfy more immediate demand — has proved surprisingly resilient.
The metal rocketed 8 per cent higher Tuesday to $2.08 (U.S.) a pound in London, its highest level since hitting a low of $1.26 in December. It’s a tidy gain — but still leaves prices about 50 per cent short of where they were a year ago.
“There is a real reason for copper’s rebound, and that is the strategic interest in China and a pickup in the country’s industrial activity, which is what I was hoping for,” said Patricia Mohr, vice-president and commodities specialist at Bank of Nova Scotia.
Desjardins Securities said Tuesday it expects copper to trade around $2.50 a pound through the rest of this year, before hitting $3 in 2010.
“We believe demand from China over the next 18 months and a slow-economic– growth scenario for the Western world are sufficient to sustain copper prices at higher levels,” Desjardins wrote in a report to clients.
That’s good news for Canadian producers, said Ms. Mohr; at current levels, most miners are able to make money.
“We’re at a fairly profitable price for copper,” she said. “It is a generally profitable number for most mines around the world, including Canada. This is a good piece of news.”
Here are three Canadian companies poised to profit from increasing demand for the industrial metal, which is used in the production of cable, wire and electrical products. It’s also a key component in pipes used for plumbing, heating and ventilation systems.
First Quantum Minerals Inc.
The company has copper and gold properties in Zambia, the Democratic Republic of Congo, Mauritania and Finland. This month, it raised $345-million (Canadian) in a share offering.
“The completion of the equity financing increases the company’s financial flexibility and enables the company to take advantage of opportunities that may emerge in the current market,” said Lawrence Smith, an analyst at Scotia Capital who just raised his 12-month price target 30 per cent to $52 a share.
According to Bloomberg, 20 analysts follow the company’s shares. Nine have “buy” ratings, 11 have “holds.” Their average 12-month price target is $42.93.
The shares are substantially higher than their 52-week low of $13.51 set in December, but a way off of their year-ago highs of $93.97.
“We note that 94 per cent of First Quantum’s gross revenue during 2008 was generated by the company’s copper division,” Desjardins Securities analyst John Hughes said.
The company lost $491-million in the fourth quarter, including a $245- million impairment charge. It pinned the loss on a collapse in copper prices, and finished its fiscal year with a $45-million profit.
HudBay Minerals Inc.
Despite a failed merger with Lundin Mining Corp. and a new board of directors elected largely by dissident shareholders, Desjardins Securities says HudBay’s copper holdings could push its shares higher in the coming months.
Mr. Hughes raised his price target to $9.45 a share, from $7.35, noting that 55 per cent of the company’s gross revenue last year came from the company’s copper division.
“We believe demand from China over the next 18 months and a slow-economic– growth scenario for the Western world are sufficient to sustain copper prices at higher levels,” he said.
Fourteen analysts cover the shares, with six “buy” ratings and eight “holds. ” According to Bloomberg, their average 12-month price target is $7.50.
“On March 23, the company announced that the board had resigned, with the nominees of SRM Global Master Fund appointed in their place. Peter Jones has been appointed CEO,” noted National Bank Financial analyst Ian Howat.
“The new management has made it clear that they wouldn’t be taking over the board just to dividend out the cash. They will be revisiting all of the operations and coming up with a plan for the company. They expect to make a transaction within three to six months.”
The company — which has mines in Canada and the United States — earned $15.8- million in the fourth quarter, compared to $28.5-million in the year-ago quarter.
Inmet Mining Corp.
Desjardins Securities raised its rating on Toronto-based Inmet to “buy” from “hold,” boosting its 12-month target to $47.30 from $35.75 — pointing out that every 30 cent increase in the price of copper adds $1.54 to the company’s earnings per share.
Analyst opinion is mixed on the company’s shares, however, with five “buy” ratings, six “holds” and five “sells.” Their average 12-month price target, according to Bloomberg, is $35.23.
Its 52-week trading range is between $13.38 and $98.61.
Scotia Capital’s Mr. Smith said Inmet is a strong company, but that it may be overpriced at current levels. He downgraded the shares to “sector underperform” from “sector perform,” but raised his price target to $33 from $26.75.
“Inmet continues to have a strong balance sheet, solid and diverse operating assets, and a good management team,” he said. “However, we note that Inmet is currently trading at a premium relative to its mid-tier mining peer group.”
The miner lost $32.5-million in the fourth quarter, compared to a profit of $63.6-million a year ago.

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