A Copper-Plated Hedge: First Quantum Minerals (FM, $9.90)
Health concerns and changes in electric vehicles are giving ancient copper a modern luster.
For something that’s earned its own epoch, copper has certainly gotten a bum rap – until now. Which is why Canada's First Quantum Minerals (FM.TO) may be worth a look. Copper is one of but 94 naturally occurring elements that emerged from the hydrogen bonfire of imploding stars that made the heavens and earth. But more importantly, copper is just one of a handful of metals, along with gold, silver and platinum, that will have nothing to do with pesky old oxygen.
While the rest of the earth rusts, rots, and biodegrades, cheery old copper just sits there — mostly inert — happily growing a scruffy green patina waiting for humans to find it.
And find copper, humans did.
Starting about 9,000 years ago, soft naturally occurring copper first appeared, mostly hammered into coveted jewelry and valuable implements. But by 4,600 B.C., custom smelting furnaces began popping up in what is now Serbia, dynastic Egypt and pre-Columbian North America. This Copper Age dominated civilized life for the next millennium -- and not always for the common good: Roughly 6,000 years ago, copper mining was so intense in Michigan’s Isle Royal National Park that pollution was a serious problem. It still is.
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Then, starting around 3,300 B.C., copper-smelting geeks iterated their way to a newly disruptive idea: Mix in roughly 12 percent of simple tin into molten copper, the resulting copper alloy refactors itself into a marvelously stiff, ductile, and machinable technology. The alloy was so strong and durable that it earned its own brand name: Bronze. For the next thousand years, such bronzed copper became the dominant technology in weaponry, agricultural tools and a whole slew of new implements, like bronze mirrors.
By 1,500 B.C., copper morphed into the world’s first crypto-currency. Copper and bronze coins were accepted for payment throughout the Mediterranean and China. And even though governments and economists have tried to ban copper currencies ever since, alternatives like pounds of silver, printed money, and secure bits of software, never posed a threat to perceived value of copper.
Easily 4 to 8 billion copper-appearing American pennies are still in active circulation today.
By roughly 500 BC, zinc began to hack its way into the copper-alloy code, as an alloy called brass began appearing in Rome. High-tech brass found its way into Roman piping, roofing, astrological tools, works of art and of course, chariots.
Organized state-sponsored religion followed in Rome’s passion for copper alloys. By 500 A.D., ritual bronzes, brass crucifixes, and ecumenical bells were in mass demand in houses of worship throughout Europe, Asia, and even in Precambrian America. Sources for copper became heavily defended strategic assets: Sweden crafted a well-fortified Copper Mountain, called the Falun Mine, that acted like a Fort Knox of copper, for the medieval European economy.
By the 1600s, it was nickel’s turn to find its way into the copper-alloy mix. Nickle-alloyed copper was melted into art, clocks, and sophisticated microscopes. A copper roof showed up on the top of Christ Church in Philadelphia by 1727.
But it is the dawn of the Electrical Age, in the 19th century, that made copper even more critical. The 1870’s saw electrical dynamos, made of hives of wound copper wire, going into mass production, as the Edison Company and General Electric raced to roll out electrical service. Copper made bullets more lethal, fungicidal material more sterile, and art and architecture more subtle.
New York’s Statue of Liberty is basically made human by its thin copper alloy skin, which true to copper’s form, has not eroded more than .005 of inch, since it was installed.
Information Not Copper’s Age
But the Information Age would not glow with copper’s hue. Even though core technologies for copper saw alloys grow to include over 400 different applications, and copper found its way into particle accelerators and telecommunications, other materials outperformed in the 20th century. Steel was stronger. Plastics were cheaper. Silicon was smarter. Copper was relegated to the rotary motors found in kids toys, and microgrooved piping found in air conditioners.
It is no wonder, Silicon Valley grew to have the 3rd highest GDP per capita on earth while Copper Mountain became a struggling ski resort.
But copper’s fading story has been quietly recast, as a brutal virus emerged from central Asia. When Covid-19 fears crushed the global economy, in early 2020, commodity prices for copper told a different value story from other materials. While the price for the coal used in steelmaking fell by more than 50 percent and the price for some oils fell below zero, the value of mineable copper fell by just 10 to 15 percent, or what would be expected in a normal recession.
What was the root of copper’s relative strength? Industry insiders said copper’s value was from its changing role in the global supply chain. The low-carbon economy is expected to require significant amounts of copper. The average Chevy Volt has twice the copper of, say, a traditional VW Golf. The copper coil providers to the automotive sector, like Odawara Engineering (Tokyo:6149) have become attractive, if volatile, investments.
Copper's long-known antimicrobial properties, used by ancient Egyptians, medieval Swedish and 18th-century Chinese, are also expected to play a critical role in modern pandemic warfare. Textile developers in the hospitality and healthcare industry we listened to, say they plan on ramping up copper fiber use in woven fabrics and finishes. A Canadian Toyota factory is using copper to coat handrails, as part of preventative pandemic measures.
The health benefits of the material created even a copper mania, of sorts. Media outlets questioned the overstatement of the benefits of copper in masks and clothing. But hype aside, serious capital is flowing to bring more copper to market, rather than less. Don Lindsay, CEO of Teck Resources,(TECK, $16.72) one of Canada’s largest mining companies, was blunt when speaking to investors.
“Teck is implementing a copper growth strategy,” said Lindsay, “Financed by the strong cash flows from steelmaking coal and zinc.” Lindsay says he expects his firm’s copper business to be larger than its coal business, beginning with promises to double copper production in its Chilean mines.
Other mining and mineral operators are telling a “plus copper” story as well. Vancouver’s First Quantum Minerals, for example, reported a 43 percent increase in copper production in the first quarter of 2020.
Copper-Plated Due Diligence
Where then is the point of entry for copper’s comeback? To us, it is Canada’s First Quantum Minerals. Based on our explorations, this Vancouver-based multinational has the right mix of aggressive copper strategy and tangible assets, with mines in Zambia, Finland, Turkey, Spain and Mauritania. It’s 26,000 employees are also heavily pursuing mines in Panama and Peru. Company annual reports say that of $3.9 billion of total revenues, $3.6 billion came from copper.
Frankly, First Quantum’s too-big-to-fail vibe is also attractive. This operation is essentially an extension of Canada’s British Columbia government.
If there is a magical number for First Quantum it is $3 per pound wholesale price. That’s the threshold where insiders say more mining becomes practical. And last week, traders finally pushed that ceiling.
But for all of First Quantum’s copper luster, the risks are the same as they were to native Americans 6,000 years ago: Terrible cyclical exposure. Uncertain demand. Safety. Pollution. Politics. Mining is dangerous.
Worse, the information about mines poses a special risk. John Brooks’ 1969 classic chapter “A Reasonable Amount of Time: Insider Trading” from his book Business Adventures breaks down exactly how insider data can corrupt the value of even the most lucrative new mineral discovery.
A mining analyst told us, if you haven’t looked at least a 100 mines, you really shouldn’t be looking at one. He was right.
Copper’s New Moment
Even given such risks, copper appears to be having a moment. It’s not simply that a big-tech unicorn, like Tesla or Apple, will offer safer copper-clad car controls or an all-copper smartphone. It’s that, given copper’s key role in human history, how can any sensible investor bet against 8,000 years of innovation?
