The 'Red Metal'

Continuing with our series on commodities, we now look at copper, also known as the Red Metal. Copper, just like nickel, is known for its diverse applications. Whether in building construction, industrial machineries or automotive industries, chances are, a substantial portion of the metal used is comprised of copper. And because copper has the highest electrical conductivity of any industrial metal, nearly 65 percent of copper produced is used for electrical applications.

Just as the Philippines is gifted with laterite nickel, our country is likewise rich with vast resources of copper. Roughly two percent of the world’s estimated copper resource is located in the country. Our proximity to China, the top consumer of copper, suggests that the Philippines’ copper mining potential is huge.

China’s insatiable appetite

China is the world’s leader in copper imports. The migration of global manufacturing activity to China and the resulting rapid urbanization call for a sustainable demand for copper. According to BHP Billiton, one of the world’s biggest mining companies, China’s urbanization is so massive that by 2025 they estimate that some 40 billion sqm of floor space will be built. In perspective, this is equivalent to five million buildings. In addition, the gradual shift to green technologies like electric cars and solar energy creates a new growth avenue for copper.

‘Dr. Copper’

While gold is seen as a store of value and a hedge against economic uncertainties, copper is regarded as a predictor of the global economy. Its widespread industrial application has allowed it to become an excellent barometer for the global economy. Copper earned the name “Dr. Copper” because many view the metal as predictor of future economic activity just like the work of an economist. People refer to copper as the metal that holds a Ph.D. in economics.

In 2003, copper prices increased as the US economy recovered from the 2001-2002 recession. In 2008, the price of copper tanked at the time when the US Financial Crisis was just starting to unravel. And in the latter part of 2008, copper price recovered months before the S&P500 turned the corner. Indeed, Dr. Copper is a leading indicator of economic activity.

Atlas, the copper play

Atlas Mining is a solid copper play in the market today. It is set to become one of the top producers of copper concentrates in Asia by next year. Back in the 80s, Atlas was in fact the biggest copper mine in the region. Of its three orebodies, the company is presently mining the Lutopan pit in Toledo, Cebu. The copper concentrates are then shipped to smelters, mostly located in China.

The outlook on Atlas continues to be positive, as it is expected to turn in profits by 2011. There are, however, some short-term setbacks due to the conversion of option shares and convertible debts that the market will need to absorb. These new shares priced at P10 will increase the total share outstanding significantly. In a recent investor briefing, Atlas management openly answered the concerns involving the share overhang and the losses emanating from the accounting treatment.

A week after NIKL IPO

Nickel Asia’s debut last week was a success overall. NIKL opened very strong at P19, +26.7 percent higher than IPO price. The strength, however, was not sustained. It softened during the latter part of the trading session as foreign investors locked in excess gains. Though still above the IPO price, NIKL registered a net foreign selling totalling P1.1 billion (or 31 percent of the foreign allocation) after its initial week. While domestic demand was robust, the take up from foreign investors, which took a bigger slice of the IPO pie, was somewhat lukewarm. Foreign investors were allocated 68.5 percent of the offered shares and got half of their reservations. This is an indication that local demand was much higher compared to the soft appetite from foreign investors.

Lessons learned

Atlas, despite having a solid turnaround story, did not move past its all-time high after a well-attended mine site visit. Meanwhile, Nickel Asia’s strong debut faltered despite having fundamentally sound mining prospects.

At Philequity, we study the fundamentals of the company. We also heed technical analysis for market timing. Equally important is that we pay attention to flow of shares. Atlas’ new shares arising from the convertible debts became an overhang on the stock. In Nickel Asia, despite strong local appetite, its price dropped because of the huge foreign selling in the first week of listing.

Perhaps the Philippine Stock Exchange (PSE) can review its policies on disclosures, particularly on convertible structures. Investors should be made aware of the potential dilution arising from complex debt structures. The strike price, its time frame, and other pertinent conditions should be made transparent and explained to the investing public. The PSE can also look at the IPO allocation mix between local and foreign investors. Local investors now are taking a more active role in stock market investments. It may be high time for them to be given a larger share of the investment pie.

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