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Global X Copper Miners ETF (COPX): A Suboptimal Play on Copper

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introduction

The Global X Copper Miners ETF (COPX) is an ETF valued at approximately $2 billion that covers a portfolio of 39 mining stocks that derive the majority of their income from copper mining or related activities. With copper futures currently trading above $4.75 a pound, the highest level in years, there is evident excitement about what producer margins could look like, especially more than mine capacity utilization rates are still below levels of around 85% seen in the pre-pandemic period. era of 2018 and 2019. That said, I think it’s also important not to overlook some of the recent political changes in the integral Latin American belt that could perhaps put an end to some of the largesse that these miners could probably accumulate later. line .

The winds of change in Latam should not be ignored

Over the years, the Latin American region has taken on a greater role in copper mining; more than 60 years ago, the production of copper mines in this region was only about 750,000 tons, or 19% of total world production; in recent years, production has been closer to 8.5 million tonnes, representing a whopping 41% of global production, and comfortably ahead of other geographies.

Copper mining production Geographic distribution

ICSG

Within Latam, two regions, in particular, stand out; Chile, which represents a third of the world production of copper mines, and Peru, which represents 10%.

Production of copper mines by country

ICSG

Unsurprisingly, the bulk of COPX’s top 10 holdings have significant mining operations in these two regions, so it’s clear that developments here (particularly in Chile) will likely weigh heavily on the fortunes of these stocks. Both countries have recently gone through elections and we have seen the political landscape dominated by more leftist hues; this does not bode well for the long-term prospects of mining companies.

In Chile, former student activist – Gabriel Boric came out on top, driven primarily by his rhetoric against Chile’s market-driven economic model, which may have spurred the country’s economic progress over the years, but has also led to large-scale social inequalities. Chile is currently in the process of rewriting its constitution and is also preparing a new bill to increase copper royalties and tie them to world copper prices. Basically, what you’re likely to see are some pretty tough measures that will attempt to shift any excess wealth generated by mining companies into various socialist agendas.

Some proposals being debated include levying a tax on the profitability of copper mining companies’ operating profits while also involving a sales tax of around 3% on gross copper sales (note that even if these companies are not in the dark, they will be anyway should pay taxes). Needless to say, if some of these provisions are eventually passed, Chile-based copper miners are unlikely to take full advantage of the secular demand-driven tailwinds currently brewing in the copper industry.

The new Chilean constitution will also seek to impose more burdens on miners; for example, water use may be restricted, or only temporary rights granted, in place of the permanent water use rights previously granted. There are also intentions to rescind previous mining concessions granted on indigenous lands (even if these concessions are potentially reinstated, one would think that the mining community could be incentivized to provide pecuniary benefits to indigenous communities). There are also strong suggestions that the Chilean government will seek to nationalize the mines in order to improve the fiscal situation, providing only minimal compensation or no compensation! It might just be once, but also consider that Chile-based miners struggled with production in January, which incidentally was the weakest reading in 11 years!

In Peru too, the political landscape seems very uncertain (there have been four different cabinets in the last six months and the recently appointed Minister of Mines is not seen as having close ties to the private sector) even though the country is led by left-based Pedro Castillo. Granted, one of Castillo’s early proposals to raise mining taxes was rejected by the Peruvian Congress, but given his leftist intentions, don’t expect that to be the end of it. It should also be noted that mining companies in Peru have struggled to appease indigenous communities and ongoing protests have disrupted production.

Overall, there currently appears to be a great deal of regulatory and political uncertainty in the Latam region; the questionable investment climate there means that some of the Latam-based constituents of COPX may need to redirect their investment and production plans. The likes of FCX and LUNMF are currently sitting on the fence and waiting for more clarity to emerge.

Final Thoughts

China’s slowdown in recent months is undoubtedly concerning for the outlook for copper, but recent reports on factory and construction activity show some form of stabilization there. There are also signs that reforms such as the “property tax” may be stalled for now while further stimulus measures are rolled out there. Ongoing geopolitical tensions and associated sanctions against Russia (the world’s 7th largest copper producer) could further disrupt supply dynamics. Note that copper inventory levels are currently at rather low levels of under 73,000 MT. Meanwhile, the metal also continues to benefit from runaway inflation expectations, as evidenced by the strong correlation with the 10-year equilibrium rate.

Correlation with inflation broken down over 10 years

Overall X

Then, in the longer term, given the continued proliferation of electric vehicles across the broad spectrum of auto sales, a broad copper-driven decarbonization pivot, and a burgeoning “green power” narrative across the world, you would think that this metal has the right ingredients to get started. a potential super-cycle.

Obviously, there’s a lot to like about copper, but given some of the developments I’ve covered in the previous section, I’m not too sure that COPX is the most optimal way to generate copper. ‘alpha at this point, especially as a ratio of strength ratios and the valuation picture implies unattractive risk-reward.

Since the 2020 lows, the price of COPX has also risen nearly 5x, and if you compare COPX to an ETN that hedges the Bloomberg Copper Subindex Total Return (JJC), things look pretty high with limited value.

COPX ETF Price

Stock charts

Also note that currently COPX doesn’t seem to have much of an edge when you juxtapose it against a more diversified play such as the iShares MSCI Global Metals & Mining Producers (PICK) ETF. PICK is an ETF that covers miners involved not only in copper, but also in diversified metals and mining, aluminum, steel, precious metals, etc.

iShares MSCI Global Metals & Mining Producers ETF <span class=

Stock charts

COPX is currently trading at a forward P/E multiple of 9x, while PICK is trading at around 22% discount of 7x. The income angle is also more compelling here, with PICK offering a return of over 5%, almost 5 times more than COPX’s corresponding figure of 1.25%.