Copper prices (HGN24) have been on the rise lately, and the industrial metal is attracting quite a bit of attention. In fact, some analysts now argue that copper is overbought as it trades near highs - but Goldman Sachs (GS) is super optimistic, predicting prices could soar to $12,000 per ton by the end of the year.
The brokerage firm thinks we're going to see more demand for copper, especially from industries that are all about going green, like electric vehicles (EVs) and renewable energy. Along with rising demand, there's not enough copper to go around, which could lead to what Goldman calls a "stockout risk" – basically, an extreme shortfall of copper inventories by the fourth quarter of 2024.
That means any pullback in copper prices could be a buying opportunity to invest in longer-term upside. Against this backdrop, investors might consider investing in shares of diversified mining giants with exposure to copper, like BHP Group (BHP) and Rio Tinto (RIO). Not only are they well-positioned to benefit from continued upside in copper, but both stocks look attractively priced right now. Here's a closer look at these two copper stocks.
Copper Stock #1: BHP Group
BHP Group Ltd (BHP) is a major player on the global stage. With a diverse portfolio that includes iron ore, copper, and metallurgical coal, BHP is a true commodity powerhouse, with a market cap of $144.8 billion.
They've also shown a strong commitment to rewarding their shareholders, recently announcing an interim dividend of $0.72 per share for the 6 months ended Dec. 31. BHP's current dividend yield is right around 5%, showcasing their ability to deliver competitive returns to investors.
Now, looking at how the stock itself has been performing, BHP has pulled back 13.3% on a YTD basis, narrowing its 52-week return to just 1.5%.
With a forward P/E ratio of 10.97, BHP has rarely been cheaper. This valuation marks a discount not only to the stock's own five-year historical average P/E of 13.25, it's also cheaper than the sector median of 16.42. At current levels, it seems like the stock could be a bargain, especially given BHP's crucial role in supplying essential materials for the future economy.
On the earnings front, BHP reported a first-half fiscal year 2024 underlying EPS of $1.29, just a tad lower than the previous year's $1.30. That translates to $2.59 per ADS. Their underlying EBITDA margin stands strong at 53.3%, though it's slightly down from 53.5%.
Looking ahead, analysts are targeting marginal EPS growth to $5.24 for the fiscal year ending June 2024.
Notably, BHP is actively making strategic moves to capitalize on the current fundamental environment. They've teamed up with Ivanhoe Electric to secure more copper and critical minerals in the U.S., both key for the green energy shift. They're also eyeing strategic acquisitions, like their interest in Anglo American (NGLOY), to strengthen their resource base and market position.
Analysts are feeling pretty upbeat about BHP, with a consensus rating of “Moderate Buy.” Out of 12 analysts, 5 are saying it's a “Strong Buy,” 1 suggests a “Moderate Buy,” and 6 recommend a “Hold.” They've set a mean target price of $63.67, which suggests a potential upside of about 7.8% from the current price.
Copper Stock #2: Rio Tinto
Valued at $87.5 billion by market cap, Rio Tinto Plc (RIO) is a key player in the global commodity supply chain, known for its vast operations in mining essential minerals and metals like aluminum (ALN24), copper, diamonds, gold (GCM24), and iron ore.
Like BHP, Rio Tinto also rewards shareholders with dividend payouts. Most recently, it declared a dividend of $2.58 per share to be paid on April 18, following a pattern of semi-annual dividends, with the previous one being $1.76 per share paid on Sept. 21. The trailing 12-month yield stands at a healthy 6.21%.
Looking at Rio Tinto's stock performance, the shares have notched a 52-week return of 12.8%, though RIO has pulled back about 6.4% so far in 2024. More recently, the shares were verging on overbought territory after a sharp rally, but seem to have leveled out before getting too frothy.
When you dig into Rio Tinto's valuation, the numbers suggest the stock might be a bit of a bargain. With a forward P/E ratio of 9.70, RIO is trading at a roughly 41% discount compared to the broader materials group. This low P/E ratio could be a golden opportunity for value investors to snap up the company's earnings at a more affordable price.
Financially, Rio Tinto reported underlying earnings of $11.8 billion for 2023, down 11% year-over-year but roughly in line with analysts' expectations. CFO Peter Cunningham said inflationary pressures are starting to moderate, and backed the company's commitment to paying dividends, noting that "we remain in a very strong financial position and can afford to undertake our growth agenda and continue to pay out at 60%."
Strategically, Rio Tinto isn't just sitting on its laurels. The company is looking to broaden its horizons by eyeing the potential acquisition of a stake in First Quantum's mines in Zambia, in partnership with Saudi Arabia. This move is part of a larger strategy to diversify its assets and boost its global mining operations, especially in copper.
The analyst community is quite bullish on Rio Tinto, with a consensus rating of “Strong Buy.” Out of 12 analysts, 10 suggest a “Strong Buy,” while 2 are advising a “Hold.” They've set a mean target price of $86.50, which suggests a potential upside of 23.8% from the current price.
The Bottom Line on Copper Stocks
Wrapping up, both BHP and Rio Tinto look attractively priced right now for investors looking to add exposure to the booming copper market. With copper prices expected to climb and these companies already well-positioned in the industry, they could be smart picks for your portfolio. Plus, their high yields make them even more appealing for income investors. So, if you're thinking about scooping up mining stocks, BHP and Rio are worth a look at current levels.
On the date of publication, Ebube Jones did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
