The global energy transition away from fossil fuels and toward low carbon sources is well underway.

In fact, investment in this transition is accelerating. In 2022, a little more than $1 trillion was plowed into new technologies such as renewable energy, energy storage, carbon capture and storage, electric vehicles, and more. Not only is this a new annual record amount, but—for the first time ever—it matches what was invested in fossil fuels, according to Bloomberg New Energy Finance (NEF).

As we seek to electrify everything, from power generation to transportation to heating (heat pumps), copper is the one material that’s used every step of the way. That’s a key reason why the International Energy Agency (IEA) estimates that global copper demand will increase by almost 40%, to 33 million tons a year, by 2040.

And this is the company that will benefit…

However, at the same time that copper demand is growing due to the energy transition, the global supply pipeline is running thin due to shrinking exploration budgets and a dramatic slowdown in the number of new deposits discovered, as well as the quality of those deposits.

The stark reality was laid out by S&P Global, which stated that most of the copper that’s being produced currently comes from assets that were discovered in the 1990s!

Peru Unrest = Opportunity

The world’s largest copper-producing countries are Chile and Peru, so it is relevant that anti-government protests and unrest in Peru are threatening copper supply from the world’s second-largest producer. (The country produces about 10% of global copper supplies.)

Freeport-McMoRan, which operates Cerro Verde—Peru’s largest copper mine—said in an earnings call several weeks ago that the company had reduced ore extraction by 10% to 15% at the site, to about 350,000 tons per day, in a bid to conserve supplies critical to keeping operations running.

Peru’s National Society of Mining, Petroleum and Energy thinks perhaps 30% of the country’s copper supply—approximately 2.4 million tons a year, or about 11% of the world’s mined total—is at risk.

The unrest in Peru highlights the fragility and risks to global copper supply, and only strengthens the long-term bull case for the metal. Or, as the Financial Times’ Lex team put it, “…a lot of copper comes from very few places.” Almost half of world supply comes from Chile, Peru, and China. The number-one copper producer—Chile—actually saw production fall in 2022, thanks to water and labor shortages, as well as a tax dispute with the government.

Global copper supply in 2022 suffered a disruption rate—the amount of supply lost versus forecasts—of 6.3%. That was well above the usual average of 4% to 5%, according to the commodity trading firm Trafigura. The rate in Peru was even much higher, at 12%.

With the latest flare-up in Peru’s longstanding issues with the mining industry, it seems to be more likely that we could see copper prices as high as $12,000 or $13,000 per ton in 2023.

Even over the short-term, we already have seen a rally of more than 20% (to nearly $9,000 a ton) in copper’s price since the late-September lows, thanks to China’s economy reopening. Mining stocks with copper exposure have done well in the past six months. The threats to Peruvian copper supplies will only boost their share prices further.

With that mind, let’s take a look at the mining giant that produces the most copper among the world’s largest mining companies: BHP Group Ltd. (BHP).

BHP Group

BHP engages in the mining of copper, silver, zinc, molybdenum, uranium, gold, and iron ore, as well as metallurgical and thermal coal. It also is involved in mining, smelting, and refining of nickel and potash production. Most of its revenues come from assets in the relative safe havens of Australia, North America, and Europe.

The company—the world’s biggest mining company, as measured by market capitalization—is doing quite well, to say the least. Adjusted free cash flow in fiscal year 2022 totaled $24.3 billion (a new record year) and up from the previous record in fiscal year 2021 of $19.4 billion, allowing BHP to pay down its debt. The current net debt of $333 million, as of June 30, 2022, is down from more than $20 billion in the 2016 fiscal year.

This puts BHP in a position of strength to weather economic cycles, especially since its generally low-cost, high-quality assets mean the company is one of the few miners that can remain profitable through the commodity cycle.

Despite weak output from its flagship Escondida mine in Chile, BHP management maintained copper guidance, given the strong performance of its other copper mines. BHP’s copper division accounts for about 20% of BHP’s forecast earnings.

BHP shares have rallied by a third since the start of November, due to surging iron ore and copper prices. I expect more to come.

And while its dividend will not be as massive as in the last year or two, BHP will still treat shareholders generously. The current dividend yield of 9.75% is nothing to sneeze at.The stock can be bought anywhere in the $60s per share.

— Tony Daltorio

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Source: Investors Alley