In an inflationary environment, commodities tend to outperform.
However, many investors are uncomfortable purchasing futures contracts or commodities in general. So instead, if they are looking to buy Canadian stocks to gain exposure to a specific precious metal, they often go to publicly traded producers.
In this article, I'm going to speak on 2 top Canadian copper stocks you can look at today to gain exposure to rising copper prices.
The bullish environment for copper is expected to continue into the future. If it does, these producers have a chance to outperform moving forward.
Keep in mind, there are plenty of small/nano cap copper producers here in Canada, like Kodiak Copper (TSXV:KDK). However, just to reduce overall volatility, I'm going to stick to major copper producers here in Canada, ones that have a strong history of production.
Lundin Mining (TSE:LUN)
Lundin Mining (TSE:LUN) is a popular precious metal miner here in Canada recently, primarily due to its exposure to copper.
Over 70% of the company's production profile is copper, with nickel making up the only other double digit weighting at 10%. The company contains a diverse enough portfolio that you gain exposure to quite a few metals like gold, zinc, and lead. But make no mistake about it, Lundin is significantly impacted by the price of copper.
The company is attempting to diversify away from the metal, primarily by increasing its zinc and gold exposure, although this is likely to take years. Simply put, if you're looking for copper exposure, it's arguably one of the best miners in the country.
Why the recent dip? Lundin was hit hard by a production guidance cut at its Candelaria mine in which it cut production of both copper and gold due to some hazardous mining conditions it needs to take care of.
Ultimately, this is likely to put pressure on the stock price over the short term, but it should be able to rebound.
With Lundin, it's important to keep in mind that you are investing in a company with some political and geographical risks. In fact, over 83% of its production profile is outside of North America, with 52% of it being Chile.
The company is practically printing money right now in terms of copper exposure, as average cash costs are in the $1.3-1.6/lb. Considering at the time of writing copper is in the $4.16/lb range, these are some excellent margins.
In fact, prior to the copper surge, Lundin struggled to produce positive free cash flow, but has posted 3 straight quarters of positive FCF in a row, and this trend is likely to continue.
The company trades at only 8 times forward earnings and 1.9 times forward sales, well below historical averages.
Ero Copper (TSE:ERO)
Ero Copper (TSE:ERO) is another Canadian copper producer that places a heavy reliance on the metal. However, the company also has some gold production.
2021 guidance from Ero is copper production of around 45,000 tons whereas gold sits at 37,500 around 37,500 ounces.
The company does pose jurisdictional risk much like Lundin in the fact that its production profile is solely located in Brazil. In fact, the company has more than 40 years of operations in the country.
Its core mine is the MCSA Mining Complex, which is located in Bahia State, but it also does have a developmental project in Boa Esperanca which is located in the Para Sate.
The company's cost profile is significantly lower than Lundin's. In fact, both of its mines have cash costs of $0.97/lb or lower, producing some pretty hefty margins right now.
And in terms of its gold exposure, all-in-sustaining-costs of $720 are not too bad either.
In terms of free cash flow, it's apparent the company is benefitting significantly from a rise in copper and gold prices. In fact, if we look to free cash flows to kick off 2021, the company generated more in a single quarter than it had the 3 previous quarters combined.
From a valuation standpoint, Ero is still trading at relatively attractive price levels of just over 10.3 times forward earnings and 4.2 times sales. When we consider 2021 earnings are expected to come in nearly 70% higher than 2020 levels, it seems like a fair price to pay for this small cap miner.
Just keep in mind, as a small cap copper miner it does pose significantly more risk for a few reasons. For one, its reliance on copper is even more than a company like Lundin. And secondly, small cap stocks tend to be much more volatile overall. At the time of writing, Lundin is nearly 4X the size of Ero Copper.
Overall, these 2 Canadian copper stocks should benefit from the current environment
I'm not really a fan of investing in cyclical plays like this for the long term. But, there is no doubt that copper prices are likely to stay high for the next few years and as a result, there is likely some short term gains to be made on Canadian copper stocks.
Just keep in mind, that although there is likely still value here to be had, a lot of it is priced in. We can also see the overall volatility in these copper stocks as something as simple as a short term guidance cut to Lundin's copper profile caused its share price to drop by double digits.
Expect some significant ebbs and flows over the next few years in these copper producers, and be ready to hang on for the ride.