The price of copper hit an all-time high on Friday. After an uncertain demand outlook last year, the resurgent global economy is expected to unleash pent up demand. Despite the high copper price, I think the metal could yet go higher. That could help propel copper shares further.
Here I explain why I’d consider buying copper shares of one well-known producer for my portfolio.
Record prices
The copper price for July delivery moved up last week. It beat the former record price, which had stood for a decade.
There are several reasons driving this in my view. One is an expected increase in demand as industrial output rises after the pandemic. For example, copper is a key component in electricity transmission.
Another factor is a possible future supply constraint. The world’s biggest producer, Chile, is considering a progressive tax on copper sales. That would push up the tax rate. Analysts expect such a move could reduce investment in Chile. Even if the proposal doesn’t make it into law, it suggests a tougher approach to taxing copper producers.
Despite its strong performance over the past year, some mining executives continue to see more price increases ahead for copper. Constrained supply and increased demand could continue to push the price up.
I’d consider buying these copper shares now
To attempt to benefit from possible future price increases, I would consider buying shares in Antofagasta (LSE: ANTO).
This well-established mining company is best known for copper. Most of its copper mining activity is in Chile. Given the proposed copper sales tax there, that might seem like an odd place to seek to ride any price boom.
So, why do I still see value in Antofagasta?
Antofagasta entrenched in Chile
Copper is a key export for Chile. The metal accounts for around half of the South American country’s exports. It shipped $33bn of copper overseas last year alone. So I expect the country will try to figure out how it can increase its tax take while continuing to attract investment in mining.
Antofagasta has decades of experience in Chile. It understands the regulatory and political risks there as well as anyone, in my view. So I expect that it will be able to navigate the political environment skilfully.
Nonetheless, these copper shares face risks. Mines are not mobile and Antofagasta is heavily reliant on Chile. So there is a risk that future mining volumes and profit margins could fall.
Benefits of scale
Antofagasta’s concentration in four key mines in Chile offers benefits of scale. Its experience and established customer relationships allow it to mine and sell copper cost effectively. The company has recorded operating profits of over $1bn in each of the last four years.
The shares currently yield 2%. I see these copper shares as a way I could get exposure to the copper market more broadly.
But there are risks. Geographic concentration is one – as is the reliance on copper as the core profit driver.