MARKETS SPECTATOR: Copper-plated opportunity

Copper has been starring since its cyclical December slump and some related stocks are underperforming their key metal and a ripe for the picking.

From a seasonal perspective, copper is in its strongest period of the year and all the positive economic data coming out of China isn’t doing it any harm this year either.

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In the above chart we can see that seasonal lows are typically formed around December and last year was no exception. On the below chart, copper prices (white line) have been rallying since forming lows in November and December.

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From a simple eyeball analysis, it looks like copper prices have rallied by approximately 6 per cent since the December lows.

However, for ASX-listed copper stocks the story is very different, especially for the likes of OZ Minerals and PanAust which have underperformed the physical commodity over the last year by 37.5 per cent and 18.8 per cent respectively.

Assuming copper prices continue to rise during this period of seasonal strength, then there may be some long opportunities in copper names that have lagged. Interestingly, it doesn’t look like I’m alone in my thinking either with 19 out of 23 brokers having a buy or hold recommendation on OZ Minerals and an average target price of $7.89, approximately 11 per cent above the last traded price.

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From a technical perspective and judging from recent price action and strong support just above the $6.50 level, bullish interest looks to be slowly increasing and, assuming the backdrop of rising copper prices, there’s a good chance the stock will continue to grind its way higher.

Iron ore

Iron ore looks to be in an interesting situation too, especially with the Chinese New Year beginning on Sunday. This typically sees the country grind to a halt for the best part of a week or two.

As it stands, iron ore spot prices are trading at $US154 per tonne while the first quarter 2013 consensus forecast price is lagging significantly at $US120 per tonne. The second quarter isn’t much better either at $US115 per tonne.

The general view among the bearish research community was the iron ore prices would fall back towards the $US120 level as Chinese New Year approached.

Well, as is frequently the case, they’ve got this completely wrong and now find themselves significantly behind the eight-ball in terms of forecasts. So what does this mean? In my view, the likelihood of iron ore price upgrades and therefore stock upgrades is increasing by the day.

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The above chart shows that most of the iron ore players have tracked the recent surge in iron or prices quite closely. In fact, the only stock to show a negative return since iron ore prices bottomed in September is Atlas Iron.
However, by judging by recent price action, it appears it may be about to play catch-up as it looks very encouraging on the charts. It’s well supported by the investment community, too, with 78 per cent of brokers having a buy or hold recommendation on the stock and a target price of $1.89.

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In the chart above, the long term downtrend (white) has been broken, as has the short-term downtrend (in green). The increases in volume (circled) on up days is very encouraging, too, as it indicates a real commitment from the buy side.