Why Is Copper Rallying? 📈

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Founder’s Recap

Why is Copper Rallying? 📈

This year, commodities like gold and silver are grabbing headlines with their record-breaking highs, but one metal has been growing even faster and might even be a cooler story - copper, having shot up by 18% just this year (gold and silver are up 14% and 10% respectively)!

In fact, copper prices punched through the US$ 10,000 per tonne barrier for the first time in two years just this Friday! What has been fuelling this metal and can you make money off this?

What’s Going On?

In 8th grade economics, we learnt that the price of something rises if demand increases or supply decreases - and in copper’s case, it has been both!

Supply Decrease

• Mining Disruption - The forecasted copper surplus for 2024 has vanished due to supply disruptions. Closures, such as Panama’s order to halt First Quantum Mineral’s mine and Anglo American Plc’s production cut have flipped the outlook from a surplus of 467,000 tons to a deficit of 450,000 in the second half of 2024!
• Reduced Production - Chinese top copper smelters are collectively reducing production due to a raw material shortage (copper concentrate), as treatment charges (TC) in China dropped to US$ 11 per metric ton from US$ 46 per metric ton (76% decline) in two months, the lowest since 2013.

Demand Increase

• Electric Vehicles: Copper plays a crucial role in electric vehicles (EVs), being utilised in electric motors, batteries, inverters, wiring, and charging stations due to its durability, flexibility, dependability, and excellent electrical conductivity. EVs require as much as 4x the amount of copper used in a typical combustion engine vehicle. Electric cars accounted for around 18% of all cars sold in 2023, up from 14% in 2022 and only 2% five years earlier, in 2018.
• Data Centres: Data centres require large quantities of copper to be used because of its electrical properties. 75% of copper demand for data centres is used in power distribution (wires and cables). To give you perspective, Microsoft’s US$ 500 million data centre in Chicago required 2,177 metric tonnes of copper in its construction!

Why Should You Care?

India's copper demand is poised to surge by 11% in FY24 and FY25, outpacing global growth rates, fuelled by infrastructure spending and the shift towards renewable energy, targeting a 500 GW capacity. Government initiatives such as the smart city programme, electric vehicle expansion, and railway electrification further bolster copper consumption.

Although the increasing prices of copper do not bode well for India, as it imported copper worth Rs. 27,000 crore in FY23 (a 23% increase YoY) and is a net importer of the metal, investors can tap into this structural trend by considering companies that can benefit from it.

Examples include cable and wire companies (where the main raw material is copper but they are still able to pass on the increase in prices as they are integral to infrastructure) and Hindustan Copper, India's sole copper ore mining company, poised to capitalise on rising copper prices (which have already risen by 26% this month).

Market Stories

How AurionPro Solutions Became a Multibagger IT Stock 💻

7x - that is the return today’s company has given its investors in a mere year, and there might just be juice left in this story!

Having been around since 1997, AurionPro Solutions is a lesser-known IT industry player that didn’t start successfully - in fact, it paled in comparison to its peers.

For years, AurionPro recorded a 15% YoY revenue growth and EBITDA margins at 14%, while peers boasted a 25% YoY revenue growth and EBITDA margins above 30%. It is no wonder the company was valued at a mere 6x 1-year forward PE, while peers traded around 15-20x!

To put an end to this, the company identified 2 major areas where it needs work:

1. It needed to create more patented technology, instead of being just an IT services company
2. It needed to enter into forward-looking sectors for business

Thus, in FY18, began the turnaround of AurionPro into a multi-bagger IT stock - from being unheard of to becoming a sector favourite!

1. Creating Patented Technology

Creating the tech from scratch and patenting it has 3 benefits:

• AurionPro becomes irreplaceable to clients that buy the product, resulting in long-term contracts, as opposed to just offering an IT service created by someone else
• Margins on a patented product are in the 25-30% range, as opposed to the 15-20% in regular IT services, making the former a lucrative bet
• The recurring need for improvements and maintenance on patented products (a need only AurionPro can fulfil) results in a steady flow of revenue

Until FY18, the patented products and IT services revenue split was at 20% and 80% respectively, but AurionPro decided to make some moves.

Cut to FY24, under the guidance of Ashish Rai (who has been promoted to CEO), AurionPro presents itself in a whole new light, with over 50% of its business coming in from patented products and its allied services!

2. Entry Into Newer Industries

Until FY18, the company exclusively dealt with the banking industry, tending to the technological needs of over 200 clients, comprising the largest banks in Asia and around 10% of its clients being Fortune 500 companies - but AurionPro wanted to be present in other sectors too.

In this pursuit, the company chose a few new segments:

From not existing 6 years ago, this segment labelled Technological Innovations now makes up 50% of revenues, with it growing by 50% YoY for the last 2 years (while the Banking segment has grown by 15-20% YoY in the last 2 years)!

The result? The last 2 years have been the best in the company’s financials across the last decade, showcasing a 33% YoY average growth rate in revenue, and margins went up to 22% - finally catching up to the peers it lagged behind before.

Even from a valuation standpoint, the company now trades at a 30x 1-year forward PE, showcasing a massive re-rating of the company’s image in the eyes of the investor.

With the company’s Rs. 900 crore order book (1.4x the 9MFY24 revenue), with a 40-60 split between banking and tech innovation segments, the future of AurionPro has only just begun, with the expectations of a 35% CAGR growth income over the next 3 years.

So, while you may have lost out on last year’s gains, you may want to keep a close look at this stock now!

We discussed all this and more on the latest episode of Common Cents by Rupeeting so check it out below!

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