Green Light for The Red Metal
Featuring Peter Boockvar
Published on: April 29th, 2019 • Duration: 13 minutes • Asset Class: Commodities • Topic: Valuation, EVs, Copper, Electric VehiclesPeter Boockvar, CIO of Bleakley Advisory Group and editor of the Boock Report, returns to Real Vision to discuss his bullish outlook on copper. He notes electric vehicles as one of main drivers for future demand, highlights the supply deficit situation, and considers Southern Copper as the way to trade his thesis, in this interview with Jake Merl. Filmed on April 25, 2019.
JAKE MERL: Welcome to Trade Ideas. I'm Jake Merl, sitting down Peter Boockvar, CIO of Bleakley Advisory Group and editor of the Boock Report. Peter, it's great to have you back on the show.
PETER BOOCKVAR: Great to be here. Thanks, Jake.
JAKE MERL: So, let's get right into it today. What's your trade idea?
PETER BOOCKVAR: My trade idea is Southern Copper as a way of playing a very secular strong demand story for copper. I'm very cautious on the global economy. So, it's kind of weird for me to be focused on a copper stock, which is obviously very economically sensitive in a world that's clearly slowing down. The day that I say this, I read that the South Korean economy contracted in the first quarter, 50% of South Korean economy is export. So, it's a great tell on global trade.
We know the Chinese economy is slowing down notwithstanding the recent stimulus. But I think that the demand drivers- particularly a couple areas that I will talk about for copper, and supply deficits that I'm seeing, and I expect over the next couple of years, could help the commodity and could help this particular stock, which is one of the biggest and most profitable and lowest cost commodity producers in the industry. And then lastly, really looking at commodities generally, and the S&P Commodity Index, trading in a historic low relative to the S&P 500. So, if you're looking for any sort of mean reversion between commodity prices and the stock market, I think this is a really great way to play it.
JAKE MERL: So, even though you're bearish on global growth, you're bullish on copper, could you explain that a little more? PETER BOOCKVAR: It's very difficult for me to reconcile. But the key demand drivers that I see will be able to replace like falls in construction, for example, in China, is the electric vehicle market globally, is a voracious driver of that copper demand, in addition to renewables, where copper goes into solar panels, and also wind turbines. So, talking specifically about the electric vehicle market, which as of 2017, was only about 3 million units globally, by 2020, that's going to be 13 million, by 2030, that's going to be 125 million.
And the importance of it for copper is the component for each vehicle that uses copper. So, the usual internal combustion engine car uses on average, depending on the size of the car, 25 to 50 pounds of copper. Whereas a hybrid vehicle, which is sort of both, uses about 85 pounds of copper per car. Then you look at the plugin hybrid, uses 130 pounds per car. And then the pure battery, plugin electric vehicle uses 185 pounds of copper per vehicle. Just that shift to electric vehicles, which is a secular story, is going to raise the demand for copper.
You look at China, for example, China is basically mandating that they move more towards electric vehicles. So, last year, they used- it was about 5% of all sales was EVs, that's going to be 20% by next year. That's going from about 1 million cars to 5 million cars in just a couple of years. So, right now, if you look at the pie of copper usage, transportation is about 13% to 15%. And I see that going up a lot. Now, a third of that is construction. And I grant that's going to be susceptible to any slowdown particularly in China since they're the biggest consumer of it.
But I do think that these other demand drivers could offset that, at the same time, that there is major supply issues and deficits in the industry. We've had years of suppressed commodity prices. What that does is it leads to years of a lack of investment and new production. Because companies focus on battening down the hatches, they focus on cash flows, they focus on surviving, rather than growing.
And we're seeing that in a variety of commodity markets where any- the slightest bit of supply disruption could lead to a spike in prices. Particularly you look at iron ore, for example, when that had the damn blow up basically, in Brazil, you've seen a spike in iron ore, because the industry has been somewhat under invested for years. And one slight issue with supply and you get this kind of jump.
So, I think it's like I said, I'm trying to reconcile my worries about global growth. But I think if you're looking for a commodity that can really start to outperform the stock market because of the broad and very far deviation in performance, that this is a really interesting one.
Now, getting specific about Southern Copper, it's one of the largest global copper companies, it's got about 2 billion pounds of copper production expected this year. Their costs are going to be on 80 cents a pound. Right now, copper is about 2.65 - 2.70. That 2 billion, over the next six years by 2025, is going to go to 3 billion. They produce in Mexico and Peru, Mexico, because their biggest shareholders group are Mexico, so two very favorable geographies to be doing it from a political standpoint.
So, I have the safety, I don't have to worry about someone taking over their mine, at least you hope with the new president of Mexico, he's a little loony. But I'm assuming he's not. So, a very solid company, very low-cost producer with a lot of growth in its supply base over the next couple of years in a market that is supply constrained. And in a demand side picture, where you have these major secular stories that I think can offset the historical, conventional uses of copper, mostly being construction. And tying that into the Chinese property market, which has seen quite a bubble of the last couple of years.
JAKE MERL: So, why are you suggesting going long this stock rather than copper specifically?
PETER BOOCKVAR: You could trade this through copper futures. But the timing is always an issue. And with Southern Copper, it's paying a 4% dividend yield, which that is a variable dividend yield every year depending on their cash flow as they adjust it. But at least right now, based on where they have prices and what kind of production they have, they're comfortable paying a 4% dividend. So, that's sort of somewhat of a downside protection.
The stock was near 60 last year, then you had worries about the China slowdown, the stock went to 30. Now it's back to the high 30s. That helped out by stabilization on some of the Chinese data because there is a correlation between copper and the Shanghai Composite. But again, I'm making the argument that the secular drivers, electric vehicles, and solar and renewables could help to offset that from the demand side.
JAKE MERL: So, is this a short-term trade idea? Or are you looking to take advantage of the longer secular trends?
PETER BOOCKVAR: I think this is a longer secular trend. But that said, if copper prices just stay where they are, this company is going to make a lot of money that can continue to pay that dividend. And if there's any stabilization and global growth whatsoever, it could get a nice boost, again, because there's very little room for error on the supply side. So, yes, the demand side will falter if growth slows, but I think supply could quickly adjust to that, again, because there's been very little investment in copper production globally over the last couple of years because of the somewhat depressed prices.
JAKE MERL: So, how correlated is this stock to the actual copper price? Because I know sometimes these stocks can deviate from the underlying commodity.
PETER BOOCKVAR: Yeah, it can. The stock itself could really just trade off, like I said, the Shanghai Composite, for example, in addition to the futures in copper, but it still is pretty closely linked to stock and the underlying commodity, because this is pretty much all they do. They do spit out silver and zinc, and some others as sort of byproducts. But their main focus is copper, and they're pulling it out of the ground. They're taking it to their smelters, and they're also refining it. So, it is a vertically integrated copper company.
JAKE MERL: So, would you be buying the stock? Let's say if you weren't super bullish on copper, let's just say you were flats neutral, would you still be a buyer of the stock?
PETER BOOCKVAR: I'm not sure. It's really my focus was copper is a really interesting commodity right now with the demand side being so tremendous over the next 10 to 20 years. And then I backed into what's the best way of playing that. And of the copper companies out there, I chose Southern Copper. BHP, a major commodity producer, they produce a lot of copper, but it's only about a quarter to a third of their business. Freeport is another major copper producer. But they've had issues dealing with the Indonesian government with their major mine there. And plus, they have some balance sheet deleveraging that they still need to do. Southern Copper just seemed to me the cleanest, the best balance sheet, good dividend yield, attractively valued, and very leveraged to any upside in the price of copper.
JAKE MERL: So, break it all down for us, Peter, where do you enter this trade? What's your stop loss, and what's your target price?
PETER BOOCKVAR: So, the stock right now in the high 30s, 38, 39 call, it was down from near 60 last year. It traded down to 30, as I mentioned due to the worries about China, but I would be still find this area an attractive value. So, I do think that over the next couple of years, it could get and exceed that $60 level, again, because of years of underinvestment in the industry that is leading to supply deficits over the next couple of years. And this electric vehicle secular story with their voracious demand for copper in each and every vehicle really is going to be a constant and perpetual demand side story where transportation as a percent of usage for copper is going to go up a lot over the next bunch of years and offset copper's reliance on construction.
JAKE MERL: And would you have a stop loss for this trade?
PETER BOOCKVAR: So, the stock bottomed out in the low 30s. So, I would pretty much use that as an opportunity. But the one thing about copper is- or commodities in general, is you want to buy it when the price is relatively low, you want to sell- So, let's just say Southern Copper got down to the low 30s, that's because copper probably fell to below two and a half, maybe down to two and a quarter. Well, that would further freeze copper production, which would then be the genesis for the setup for the next rally in copper. So, it's one of those things that if you buy a company that you know is going to be in business, that you know has a strong balance sheet, that on weakness, you actually want to buy it because these things tend to mean revert.
JAKE MERL: So, taking all this into consideration, what would you say is the biggest risk to this trade?
PETER BOOCKVAR: It's really a global recession that really depresses the price of copper, and things stay depressed for a period of time and that copper goes back to two bucks, for example. Now, Southern Copper- because their costs are 80 cents a pound, they'll still be fine, they'll still make money, but the stock unlikely will be near $40 or probably be lower. So, it's really global growth that will swamp the demand side that I'm talking about. And demand will fall so much that will then bring that market back into equilibrium, which right now, is in deficit. And that would obviously threaten this net. And that's one thing I'm worried about. I'm worried about the global economy. It's clearly slowing.
JAKE MERL: Peter, that was great. Thanks so much for joining us.
PETER BOOCKVAR: Thank you, Jake.
JAKE MERL: So, Peter is bullish on copper. Specifically, he suggests going long Southern Copper, ticker SCCO at 39 with a stop loss at 32 and a target price of 60 over the next 12 months. That was Peter Boockvar, CIO of Bleakley Advisory Group. And for Real Vision, I'm Jake Merl.