Copper miners offer huge buying opportunities

Copper is up 24 percent for the year, currently hovering around $9,000 per metric ton after briefly hitting a record $9,091/tonne last week. Meanwhile, LME inventory levels have dropped 30 percent this year.

The International Copper Study Group's (ISCG) latest statistics reveal that the reason comes back to supply and demand: For the first eight months of the year, mine production had only increased 1 percent year-over-year, while usage was up 8.3 percent.

Even so, the ISCG forecasts stockpiles will end 2010 slightly in the black, with approximately 200,000 metric tons of the red metal left in surplus.

Looking ahead, however, the picture is much different.

For 2011, most market analysts expect supply to be tight, with analysts surveyed by Bloomberg predicting a median shortage of approximately 367,500 tons. The International Copper Study Group takes a more bullish view on the balance, forecasting a larger shortage of 435,000 tons.

With prices so high, and the potential for a looming supply shortage, one would expect production to ramp up considerably to meet demand, but such production increases take time. Mine utilization levels were at 79.5 percent for the first eight months of the year, according to the ICSG—lower even than in credit-starved 2009. Reopening mines closed in 2008 is a long process, and project lead times for new exploration and new mines are even longer.

That's why copper's outlook remains positive even at today's record high prices. Morgan Stanley released a statement that said:
"Although prices are currently trading close to their all-time high, strong demand trends, low inventory and ongoing supply constraints have reinforced our conviction that copper fundamentals remain the strongest in the base-metal complex."
ICSG expects the supply/demand forces to balance out by 2012, so 2011 might be the right time to profit in copper.

How To Play Copper Miners

Last week, the news was all about ETFS Physical Copper (PHCU) launching on the London Stock Exchange, but as of yet, physically backed copper ETFs have yet to launch in the States.

But there's always futures, of course, and a number of stocks and ETFs offer copper exposure too—some of which you may already have in your portfolio.

COPX, the Copper Miners ETF by Global X, gives you exposure to those that are directly responsible for the mining and production of the red metal—and if the supply forecasts are right, they're ideally positioned to benefit from continuing high price levels.

But COPX only started trading just this past April, so it is difficult to read any long-term trends into the data. Still, for what it's worth, the fund is up 29 percent since inception, while copper prices have risen only 17 percent during the same time period.

What's interesting to note is that copper outperformed copper miners from May to September, after which a dramatic switch occurred—by mid-September, miners began to lead copper prices.

A Tale Of Two Stocks: FCX And CUM

Two of the companies within COPX are Freeport-McMoRan Copper & Gold Inc. (NYSE: FCX) and Copper Mountain Mining Corp (TSE: CUM).

Freeport is the world's largest copper producer, with a market cap of $53.15 billion. Copper Mountain is less than 1/100 of its size, with a market cap of $500 million.

But it's not just in size where these two companies differ:

Copper Mountain Mining Corp is a relatively new company that isn't scheduled to start production from its new copper project until June 2011. That's right—it hasn't produced a single ton of copper this year, but its stock price has jumped a whopping 171 percent YTD.

Meanwhile, Freeport makes up 5.08 percent of COPX's assets, while Copper Mountain only makes up 1.01 percent. That's a lesson worth remembering: When it comes to sector ETFs, the smaller outperformers can often be outweighed by the larger laggards.

Of course, there is always a risk/reward trade-off when investing in a single company within a sector—you forgo the benefits of diversification for the potential of a blow-the-doors-off success story. And for every Copper Mountain Mining Corp., 10 other companies ride your $10 down to penny stock without hesitation.

And what about Freeport? The well-established copper producer, which closely tracks copper prices, is up 39 percent on the year, as it benefits from low total cash costs per pound and the forecasted supply deficit.

As always, price movements of metals directly impact the stock prices of the companies that mine them. But right now, the market seems to be valuing the companies over the metal.