Inflation is rising; the jury is out on whether it will be a short or medium-term problem, but it does seem likely that interest rates are on their way up. Investors often opt for good dividend-paying companies in such times. There is also a commodity boom. So one option for investors is to try and combine solid dividends with exposure to commodities.
Take a deeper look at the commodity boom, and one metal stands out — copper. In July, Goldman Sachs said that copper is the “most critical material in the world’s path toward zero emissions,” calling it the “new oil.”
Goldman Sachs stated: “Copper has the necessary physical properties to transform and transmit…[green] sources of energy to their useful final state, such as moving a vehicle or heating a home.” It estimates that copper demand will grow by between 600 and 900 per cent by 2030.”
It said: “We estimate that by-mid decade this growth in green demand alone will match, and then quickly surpass, the incremental demand China generated during the 2000s. Ripple effects into non-green channels mean the 2020s are expected to be the strongest phase of volume growth in global copper demand in history.”
There are many copper miners out there; but for the purpose of this piece, I look at three UK listed, large (indeed very large in two cases) companies which are solid to excellent dividends payers, have significant exposure to copper, but which may also offer investors less risk than other miners.
You wouldn’t invest in BHP (LON: BHP) purely because of its exposure to copper; instead, I would see copper as providing the icing on the BHP cake. In BHP’s latest full year to June 30th 2021, copper contributed $8.5 to the company’s earnings before interest, tax, depreciation and amortisation(EBITDA). Iron ore accounted for around three times that amount.
Nonetheless, copper is an important part of the BHP business, accounting for 22 per cent of EBITDA.
The current dividend yield at BHP is an extraordinary 11.6 per cent, and both revenue and net income increased 42 per cent at the company in its latest financial year.
Things have not been going swimmingly for Rio Tinto; it has been hit by production challenges with both iron ore and a copper mine in Mongolia
Rio Tinto’s dividends are expected to fall next year; even so, a yield just shy of ten per cent is on the cards.
When I peruse various analyses of Rio Tinto shares, I see little reference to the copper opportunity. Sure, Rio Tinto has had challenges of late; but the shift towards net-zero is a long-run trend, and I expect copper to be in demand in the long run.
The leading region in the world for copper mining in Chile and Chile has been hit by years of drought, which has adversely affected copper production.
It is a sad irony that copper is an important commodity in the battle against climate change, but climate change might have negatively affected its output.
Antofagasta (LON: ANTO) operates four copper mines in Chile.
Shares have fallen sharply to reflect Antofagasta’s problems, but even at the lower current share price, the dividend yield is only 3.67 per cent. I say only. That isn’t a bad yield at all, merely dwarfed by BHP and Rio dividends.
But Antofagasta is much more focused on copper than its two bigger rivals, which makes it interesting.
I don’t believe BHP, Rio Tinto, or Antofagasta shares reflect the copper potential; because of its copper focus, Antofagasta might represent a superior growth opportunity, but BHP and Rio Tinto appear to be less risky investments.