Don't Buy Copper Miner Stocks No Matter How Cheap They Are Now

Copper prices do not have the same resilience as oil prices, and the hard times for the miners are likely to continue, says Dan Dicker, TheStreet's energy contributor.
By Daniel Dicker ,

Copper is approaching the lowest levels of its recorded life, at $2 a pound. If you adjust for inflation we've never seen such low prices for base metals, including aluminum, zinc and iron ore.

Is there any life left in these metals or the miners that produce them? Even at these low prices I don't think so yet.

Copper has been always considered a proxy for Chinese growth, and the numbers coming out of China have been particularly bad. With growth sagging, the natural market reaction of miners should be to reduce their supply in order to maintain margins. But just the opposite has happened.

Just like with the oil companies, analysts tend to value mining stocks by their production growth. Three of the biggest copper producers -- Vale (VALE) - Get Report , BHP Billiton (BHP) - Get Report and Rio Tinto (RIO) - Get Report -- have continued to expand their production.

Here's where I think oil prices differ from other commodities and are necessarily bounded on the downside while copper prices do not have the same resilience.

Oil production continues to improve in dropping its costs of recovery and has seen some of the greatest efficiency gains in the last two years while copper tends to come out of the ground in the same way it always has. Oil is a global commodity while copper and iron ore are almost singularly connected to the Chinese economy. Inside the Chinese economy, copper and iron ore still represent a secondary "currency" and prices trend as much upon the government's stockpiles of the metal as with commercial use.

The entire breadth of commodities are under pressure, but none seem to have less of a chance of immediate recovery as the base metals and copper.

Despite the cheap prices of the mining stocks, there are few worth recommending. Vale and BHP Billiton have the added problem with their recent Brazilian Samarco mine tailing pond dam disaster, which Brazilian President Dilma Rousseff has said is as bad an environmental disaster as the Macondo oil spill in the Gulf of Mexico. Should the Brazilian government pursue as harsh a case against the two miners as the US government did in the 2010 Gulf of Mexico spill, we could see the same lagging stock prices that we've seen with oil giant BP (BP) - Get Report .

If you must own a miner right now, Rio Tinto is clearly the best. This company has the lowest costs of production and a positive free cash flow despite the lagging prices of iron ore and copper. But even with these advantages, I cannot recommend owning this company either.

Even with copper prices looking like they will breach $2 a pound, and iron ore equally cheap, the hard times will continue. It's not time to invest in base metal miners.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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