Copper prices, as well as all precious metals, have bounced strongly off the lows last year and there are many signs that this move up is only the beginning of the move that will push up mining stocks.
Precious metals prices are based off supply and demand. Inventories of copper, which show the level of supply, are sitting at the lows not seen in over two years, as reported by the London Metal Exchange. This is due to several reasons, but a large part is that precious metals miners had lower output of copper, because labor strikes hit several large mining stocks.
As a long-term investor, one needs to be aware of what is a short-term problem and what is a real, structural problem. A labor strike by a precious metals miner is not a long-term problem if that issue is resolved, as most are. While the output might be less in the latest quarters, over the long run this kind of pullback is a great opportunity to buy strong mining stocks at relatively cheaper prices.
The copper market is improving, as are most precious metals markets, for several reasons, including the huge amount of financial stimulus being pumped into the global economy by central bankers around the world. The precious metals market looks 12-18 months into the future and this added stimulus is forecasted to increase prices through inflation and boost economic growth levels. This can only benefit mining stocks extracting precious metals.
China consumes almost 40% of copper and what that country does will affect mining stocks. As the Chinese financial authorities pump more money into the system, many mining stocks are looking for a strong move up in copper prices going out several years.
Just recently, we learned that BHP Billiton Ltd. (NYSE/BHP) and Rio Tinto plc (NYSE/RIO) are spending $4.5 billion to expand their Chilean copper mine, a sign that they are very positive about the future prospects in the precious metals space.
The one stock to take a look at out of all of the mining stocks is Southern Copper Corporation (NYSE/SCCO). This precious metals miner produces copper, molybdenum, zinc and silver. Approximately 77% of the production in the past for Southern Copper was in the extraction of copper, with the remainder being split amongst silver, molybdenum and zinc.
Southern Copper has the opportunity to exceed estimates for the next few years if copper prices continue their strong move upwards. The company itself guided 2012 production estimates to be nine percent higher than in 2011. This precious metals miner now sees copper production at 640,000 tons in 2012 compared to 587,491 in 2011. The best part about this precious metals miner is that you get paid 2.3% in dividend yield to wait for the stock price to appreciate, if copper prices do indeed move up sharply.