How to identify the top copper mining stocks—and how to best to fit them into your portfolio

Stocks of firms that produce oil and base metals, including copper, generally have higher dividend yields than, say, gold stocks. As well, they’re usually much cheaper than gold stocks in relation to their earnings and cash flow.

That means they potentially have less room to fall if markets fall. That’s just another way of saying they can be considered somewhat less risky than gold—and worth considering for the Resources component of a well-diversified portfolio.

Top copper mining stocks have the added advantage that the price of the underlying commodity rises with industrial demand.

Invest in the top copper mining stocks, and tight long-term supply, along with emerging market demand, could send your shares higher

Copper should benefit not just from rising demand for the metal, but also from tightening supply.

In the short term, labour problems and technical delays will continue to slow global copper production. Over the longer term, though, ore grades are falling at many major mines around the world as producers use up the easy-to-mine ore zones in their copper deposits. Environmental issues are also making it harder for companies to acquire permits for new mines in many jurisdictions.

High prices will, of course, in the long run boost exploration efforts to discover new mines. Meanwhile, rising copper prices will lead mining companies to re-evaluate copper deposits they had previously dismissed as too low-grade to mine when prices were lower. Within existing mines, parts of a deposit that formerly seemed like waste rock can become profitable at higher prices.

Still, the higher copper’s price goes, the more incentive manufacturers have to re-design their products to use less copper wherever possible, or eliminate copper altogether. In addition, as recycling efforts get more widespread and efficient, they will bring more recycled copper to market.

That said, the combination of rising demand and uncertain supply will likely push copper prices higher over the next few years. The best way to profit from that is to invest in the top copper stocks.

To sum up, we like copper’s long-term prospects. But as always, stay out of promotional penny mines that are merely drilling for copper. Also stay out of investment vehicles (like options or futures) that will only make money for you if copper keeps going up in the short term.

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However, all in all, we think that most investors’ portfolios could include exposure to the Resources and Commodities sector of the economy, and that includes copper stocks.

Top copper mining stocks have advantages over precious metal investments

Traditionally, investors have bought copper stocks as a way to profit from general economic growth. Copper has a wide range of industrial uses (unlike gold, which is thought of more as a hedge against inflation). Copper is heavily used in the power-transmission and construction industries, in cables, wires and plumbing. And there are new sources of demand as well—such as electric vehicles (EVs) and green-energy related operations.

Gold stocks have appeal, and we see the best of them as buys. But rather than focusing solely on precious metals, we think most investors could also have exposure to other segments of the Resources & Commodities sector—such as through exposure to oil and gas and base-metal producers as well, including copper producers.

Find out how to pick top copper mining stocks for the Resource section of your portfolio

The resource sector is subject to wide and unpredictable swings in the prices it gets for its products. In the rising phase of the business cycle, when business is booming, resource demand expands faster than resource supply, so resource prices shoot up. This balloons profits at resource companies. When the economy slumps, resource prices fall, and this drags down resource profits and stock prices.

In many ways, quality mining stocks can be easier to spot during a downturn. Mining companies grew during the boom by acquiring projects—sometimes at any cost. But those companies struggle with high debt levels and little cash when the boom is over. Many of them write down the value of projects that are no longer economic at current prices.

They have also downgraded reserves that were estimated using optimistically high prices.

In contrast, companies that still have cash at a low point in the commodities cycle have the flexibility to buy producing or advanced projects at a bargain from other companies that need cash now. Distressed companies that don’t have cash flow, meanwhile, will be forced to sell assets for less than they are worth.

Mineral producers have had to adjust to the decline in resource prices by lowering their costs in order to maintain cash flow. The share prices of companies that have been successful in cutting costs will react very positively to upticks in commodity prices—provided they have low debt levels.

Use our three-part Successful Investor approach—including with top copper mining stocks—to build a diversified portfolio

1. Invest mainly in well-established, dividend-paying companies;
2. Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; Consumer; Finance; and Utilities);
3. Avoid or downplay stocks in the broker/media limelight.

The copper market is unpredictable. Does this make you want to invest in it more or less, and why?

Do you think this is a good time to invest in copper? Or would you suggest waiting to see what happens with the market?