Portfolio position: Long Southern Copper, ticker PCU
The LME (London Metal Exchange) reported copper stock levels earlier this week, which highlight declining inventories in London, a trend that has been intact since early March. As of June 29th, stockpiles monitored by the LME had fallen for 37 straight sessions. This was on the back of Shanghai Futures Exchange showing copper inventories tumbling by 18% week-over-week, which was its first drop since May.
Interestingly, while inventories on the LME have been consistently falling, inventories in the U.S., as reflected by CME stores have been consistently rising over the same time period. The CME is smaller in scale than the LME, and this data from the CME, which reflects copper demand in the U.S., likely suggests that the economic recovery is taking a little longer to take hold versus the world, namely China.
There has been speculation that China was amassing copper for speculative purposes and that the copper wasn't being used in actual infrastructure build. Evidence from China on June 29th appears to suggest that isn't the case. According to reports, Yu Dongming, who is an official at the metallurgical department of China's top economic planning body, confirmed the State Reserves Bureau had amassed a lower-than-expected, 235,000 tonnes of copper. The implication is that if the government has a lower than expected store, then copper imports are in fact being used in infrastructure building.
As we wrote on May 21st:
"We have an expression (to be fair, we have many expressions) at Research Edge and we say, "She / He has the Conch", which effectively means that whomever has the conch has the voice or the floor to continue to own the debate. When it comes to copper, China has the Conch. In fact, in the year-to-date the correlation between the Chinese stock market and copper is 0.88."
This correlation that we called out six weeks continues to hold and while both the Chinese stock market and price of copper are up meaningfully from May 21st, the fundamental case has only improved with declining inventory data from around the globe.
We are positioned long copper via a position in Southern Copper, PCU, the copper company that is majority owned by Grupo Mexcio SAB. PCU has copper assets primarily located in Peru, Mexico, and Chile, which are relatively low cost group of assets. PCU also boasts a pristine balance sheet with ~$600MM in net debt versus a market capitalization of ~$17.8BN, and TTM EBITDA of ~$1.8BN.
In effect, PCU very directly represents our TAIL theme of being long those companies with meaningful economic leverage, and limited financial leverage.
Daryl G. Jones