* Some of big funds have increased exposure to copper
* Copper market seen tilting into deficit from 2016
* Lack of investment to feed next boom-analysts
By Silvia Antonioli
LONDON, July 4 Some fund managers are increasing
exposure to copper mining companies, betting the industry has
reached the bottom of a downturn and that shares offer value for
Copper has lost almost a third of its value from a
peak in 2011 due to a slowdown in top metals consumer China,
which buys about 40 percent of global output.
Copper miners' shares represented by the Thomson Reuters
GFMS pure-play copper companies index fell by almost 40 percent
over the same period.
Historically the shares move more sharply than the metal
price and they currently look fairly priced compared with the
metal, data from metals consultancy Thomson Reuters GFMS shows.
This offers an attractive entry opportunity for investors
with a 2-5 year view because copper's fundamentals are expected
to improve in the medium term.
Data from Morningstar shows that some of the largest natural
resources funds, including JPM Natural Resources and BGF World
mining, have already increased their exposure to copper
companies in the last few months.
"Any investor with a longer-term horizon, ready to bear some
volatility, should see the next 12 months as an opportunity to
pick up copper companies, since starting from 2016 the market
should be tightening up," George Cheveley, natural resources
portfolio manager at Investec, said.
Cheveley suggested diversified miners with good copper
exposure such as BHP Billiton and Glencore
for a defensive play or First Quantum, Southern
Copper or Grupo Mexico for a higher-risk
exposure to copper.
Canadian miner First Quantum is investing in projects in
Zambia and Panama hoping to almost treble its copper production
by 2018, to become one of the world's largest
Pioneer Investments said it has been increasing exposure to
copper versus diversified miners in the last few months, buying
shares in Swedish copper and zinc miner and smelter Boliden
which unlike most copper miners is only present in
low-risk OECD countries. This stock is now a significant holding
in some of the company's key European funds, Pioneer said.
"Investing in diversified players clearly gives some
diversification of risk but usually a lot of exposure to iron
ore which faces some challenges. We tend to prefer clean (copper
companies) plays," a spokesman for the company said.
Iron ore prices are expected to decline in the next few
years as major suppliers flood the market with extra output
which analysts think will more than meet demand.
Unlike the early 2000s boom, driven by demand from China and
other emerging markets, the next copper price upswing will be
triggered by tighter supply, with the copper market predicted to
tilt into deficit from 2016, according to Ernst & Young.
Shareholders have forced big mining groups to cut or delay
investment in new projects and return more cash instead after
years of unruly expansion resulted in hefty writedowns. Rio
Tinto, for example, is planning to cut spending to $8
billion in 2015 from about $14 billion last year.
There have also been fewer major copper discoveries which
are economical to mine as well as rising production costs and
falling ore grades.
"The lack of investment interest in new mining projects is
sowing the seeds of the next supply shortage, and hence the next
boom, that will take place merely because there is not enough
supply," Ernst & Young global mining and metals leader, Mike
Elliott said. "We think in late 2016 the copper shortage will
start to bite and prices are going to have to rise to attract
new mine development but that's not so easy. You can't just turn
on the tap."
GFMS calculated the capital cost to bring on stream one
tonne of new copper production has risen by 13 percent in the
last year and reckons the incentive price to attract new
investment is roughly $7,478 per tonne. The current copper price
falls short of that at about $7,140.
Despite a recovery in the last few weeks copper prices are
down about 4 percent this year, lagging all base metals but lead
. Uncertainty about economic growth and credit
availability in China have created doubts about the country's
ability to digest copper at last year's rate of about 9 percent.
Yet China's acquisition of Glencore's Peruvian mine Las
Bambas this year for $6 billion shows Beijing still sees copper,
used in power and construction, as important for growth.
In the meantime, other large projects are being delayed by
environmental issues, lack of power and infrastructure and
political risk. .
The expansion of the Oyu Tolgoi mine in Mongolia, for
example, has been put on hold due to disagreements between the
government and Rio Tinto's Turquoise Hill, the company
developing the project.
Even if copper prices remain stable, low-cost copper
companies with solid finances and growth prospects represent a
good investment, fund managers said.
"This isn't about very strong copper prices. This is a
bottom of the cycle trade and it's a value trade, BlackRock
commodities strategist Nick Moore said, adding that on a 3-5
year view copper was his top pick in natural resources.
"As we go into the second part of the year this may be the
right time to pull the trigger."
Glencore, for example, is currently trading at a 10 percent
discount to the mining sector compared with a 13 percent premium
in November based on its 12-month forward price to earnings
multiple, according to Thomson Reuters data.
Blackrock's BGF World Mining Fund has over 20 percent
exposure to copper companies. It owns shares among others in
First Quantum, Southern Copper and also Antofagasta
whose shares are down 50 percent from a late 2010 peak.
(Additional reporting by Francesco Canepa. Editing by Tom
Pfeiffer, Elaine Hardcastle and Jane Merriman)