2 Copper Stocks With Room to Run

Copper mining stocks Vale SA (ADR) (NYSE:VALE) and Southern Copper Corp (NYSE:SCCO) could have room to run

Dec 7, 2016 at 3:04 PM
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In the wake of Donald Trump's surprise election victory, copper prices have been on a tear, as traders bet on a big infrastructure boom. In fact, copper futures rallied roughly 20% in November alone, hitting a 17-month high. What's more, the latest Commitment of Traders (CoT) report indicates that net long positions in copper have more than tripled since mid-2016, and now stand at a record high. Against this backdrop, we decided to take a look at copper mining stocks Vale SA (ADR) (NYSE:VALE) and Southern Copper Corp (NYSE:SCCO), which could have room to run.

CoT Copper Dec 7

VALE has nearly tripled in the past year, touching a nearly two-year high of $9.31 today. The stock's 10- and 20-month moving averages just made a bullish cross for the first time since mid-2011 -- when VALE shares were north of $30 and trading at post-financial-crisis highs -- further reflecting the stock's recent strength. What's more, VALE has outperformed the broader S&P 500 Index (SPX) by more than 71 percentage points in the past three months alone, and was last seen 3% higher at $9.07.

VALE chart Dec 7

On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), option traders have bought to open VALE puts over calls at an accelerated clip during the past 10 weeks. In fact, the equity's 50-day put/call volume ratio of 1.56 is in the 99th percentile of its annual range. Likewise, the stock's Schaeffer's put/call open interest ratio (SOIR) of 2.27 indicates that near-term puts more than double calls, and is 1 percentage point from its own annual peak.

However, considering VALE's rapid-fire ascent, it's possible that some of the recent put buying is attributable to shareholders seeking an options hedge in the event of a pullback. But should the "vanilla" bears abandon ship, an unwinding of pessimism could add fuel to VALE's fire.

Whatever the motive, now is an opportune time to buy VALE's near-term options. The security's Schaeffer's Volatility Index (SVI) of 62% is in the bottom quartile of its annual range, implying that VALE's near-term options are attractively priced, historically speaking. Further, the stock sports a lofty Schaeffer's Volatility Scorecard (SVS) of 99, indicating VALE shares have tended to exceed option players' volatility expectations in the past year. In other words, the stars are aligned for would-be VALE premium buyers right now.

Outside of the options pits, Vale SA (ADR) (NYSE:VALE) could benefit from a flood of upbeat analyst attention. Currently, just two out of nine brokerage firms deem VALE worthy of a "buy" or better rating. Today, in fact, Credit Suisse upgraded the mining issue to "neutral" from "underperform," and hiked its price target by 75%, to $7 from $4.

SCCO has risen more than 19% since the election, touching a two-year high of $34.79 on Nov. 11. At last check, the shares are within striking distance of that peak, up 0.4% at $34.29, though their 14-day Relative Strength Index (RSI) is now in overbought territory.

SCCO chart Dec 7

Although SCCO's options are lightly traded on an absolute basis, long calls have been more popular than usual of late. The equity's 10-day ISE/CBOE/PHLX call/put volume ratio of 5.07 is higher than 88% of all other readings from the past 12 months. However, some of those recent call buyers could be short sellers hedging against more upside.

Short interest on SCCO surged 20.5% during the past two reporting periods, and now accounts for a healthy 10.1% of the stock's total available float. At SCCO's average pace of trading, it would take nearly a week to buy back these bearish bets -- plenty of fuel for a short squeeze. Regardless of motive, SCCO -- like VALE -- boasts attractive short-term option premiums. The equity's SVI of 30% is higher than just 26% of all other readings from the past year.

Also like VALE, Southern Copper Co (NYSE:SCCO) could be overdue for some analyst love -- which could draw even more buyers to the table. Although the shares have skyrocketed more than 32% in just three months, only one in seven analysts considers SCCO worthy of a "buy" or better endorsement. Today, Credit Suisse has capitulated, upgrading the shares to "neutral" from "underperform" and hiking their price target by more than 50%, to $32 from $21.

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