Copper Mining Stocks. Orange Gold?
Or Not.

Depending what part of the last few years you were looking at, you were either mad bull about copper or bear. Why is copper important? Should you be taking your pennies, melting them down into a huge brick and then try to sell it to China? The answer to these questions and others will be answered today. Let’s talk copper.

Copper was one of the first minerals to be extracted from the earth giving birth to that exciting era known as The Bronze Age. Ok, enough history. Why is this mineral that is molded into America’s most neglected coinage so important.

Copper is used to produce: pipes for plumbing, heating and ventilation. The construction industry is copper’s second largest customer. It is also an excellent conductor of electricity. Its primary industrial usage is for cable, wire and electrical products. It takes between 300 – 400 pounds of copper to build one residential unit.

Fire extinguishers, flat-screen TV’s, biotech compounds, cookware……you guessed it. Copper.

It’s no secret as to why. Growth. China and India for that matter are building homes, automobiles and infrastructure. The key ingredient to all of which, is copper. Copper’s price is highly correlated to supply & demand. If you have enough inventory to meet demand, the price won’t move much. When you have countries scrambling to stockpile inventories, you’ll get your increase. Almost 4 billion people live in China and India; and they want their plumbing.

Although there are no copper emergencies on the horizon; these situations can contribute to price increases in the future: Chile is the number one producer of copper. Production has decreased slightly over the past few years. Certain areas of the world have experienced work strikes by miners. Over the 100 years no new major mines have been discovered.

Lets take a look at the 5 year history of copper prices.

If every man, woman and child uses copper in one way or another; what's been happening to the price over the past year or so?

The U.S. is the second biggest consumer of copper. Lately, we’re just not consuming that much. The mortgage credit problem and drop-off in home building are some of the factors.

Let’s say 350 pounds of copper go into building a home. The real estate crunch is costing about 800,000 of these homes each year. About 50 pounds of copper goes into building an automobile. The automotive industry certainly isn’t having its “Best Week Ever” as well. Together, these two industries consume about half of the nation’s copper.

The Chinese government is aware of what super-growth can do to an economy. It’s called Bust. To help control its growth the government is restricting real estate loans, cancelling export tax rebates, increasing bank reserves and interest rates. All of which have an effect of slowing down the economy. Slow down the economy, you slow down building.

Last but not least…..stockpiling. China holds copper material in inventory. When prices are high they can draw down on this supply. The only thing is, they eventually will have to buy more to replace it.

Let’s take a look at PowerShares DB Base Metals Fund. While there is no ETF which tracks only copper, this ETF tracks the price of zinc, aluminum and copper in equal amounts.

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At the time of this writing (fourth quarter 2007), copper and its related stocks seem to have a mediocre short – medium term future. Looking further down the 2008 road I believe the future is wired.

Asia is growing. Copper is necessary for anything that transmits, moves or has people it in. The U.S. is in a real estate slowdown. This could last several years more. Once the market improves, it will add to the demand; which in turn boosts the mining sector.

Speaking of companies involved in mining, let’s see what Wall Street thinks of the future. Here are several good stocks to watch.

Mining stocks with exposure to other metals are less risky plays. Rio Tinto plc engages in finding, mining, and processing mineral resources. Its products include aluminum; copper; diamonds; energy products, such as coal and uranium; gold; industrial minerals, including borax, titanium dioxide, salt, and talc; and iron ore. During 2007, BHP BILLITON made several attempts to buy Rio Tinto. So far, they’ve been rejected.

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