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David Einhorn Sees A Gold Rush In Copper Due To EVs

Jacob Wolinsky

David Einhorn of Greenlight Capital presented his thesis for Teck Resources at the recent 2021 Sohn Investment Conference. He explained that the vast amount of electricity needed to support electric vehicles would create a copper rush, giving copper miners like Teck Resources a boost.

Why copper instead of EVs?

Einhorn sees electric vehicles (EVs) as a gold rush right now and noted that many investors are diving into the sector. However, he takes a different tactic to the trend. All those EVs will need a lot of electricity, including wind and solar power and chargers. They will need electricity storage and generation.

Although the Greenlight Chief has been critical of Tesla TSLA  CEO Elon Musk in the past, he called attention to something Musk said on the automaker's earnings call in April. Einhorn believes the world will need roughly twice as much electricity as it has now if all transport goes electric and three times as much electricity if all heating goes electric.

David notes that it's impossible to know the winners or losers in the EV race, so many investors are diving into all or any of them. Further, he believes the multiples EV makers are trading at seems ambitious to investors like him who try to tie companies' values to their future cash flows. Thus, he looks at copper as an alternative EV play.

Why copper is an EV play

Electric vehicles have four times more copper than vehicles that run on internal combustion engines. Batteries and chargers require a lot of copper, and wind and solar power generation require tons of copper. Copper is used for its electric and thermal conductivity and corrosion resistance. As a side note, bitcoin mining also requires a lot of electricity, which uses copper.

The Greenlight chief calls attention to a recent Goldman Sachs report in which the firm said copper is the new oil. Based on supply and demand for copper, he said green electrification would require another 5 million metric tons of copper by 2029.

Why copper stocks should be winners

Although EV stocks have skyrocketed, material stocks had done terribly. Capital in the sector is scarce, which has reduced the new project development pipeline down more than 60% of capacity since 2008.

He explained that it takes three years to expand an existing mine and eight years to start a new one. Without much higher prices to incentivize investment, supply will likely fall well below demand by 2024. The supply gap will lead to higher copper prices. Goldman estimated $6.80 a pound in 2025, and copper prices have already more than doubled from last year's low.

Higher prices force industries to find other solutions, so Einhorn expects more scrap copper and notes that some could look to aluminum as a replacement. However, aluminum is an inferior replacement in decarbonization efforts because it will be hurt more by any potential carbon tax. Additionally, aluminum prices are up 22% this year, so any substitution will likely be further down the road instead of right now.

Freeport McMoRan

To get into copper, Einhorn looked at a pair of copper miners. Freeport McMoRan shares are up 45% this year but still trading at what he calls a "reasonable" 16 times 2021 earnings. It's a pure-play on the copper price, but in 2025, the company estimates 10% less production than this year and 25% less than in 2016. The mining industry has been challenging over the last decade, making the most significant players reluctant to add capacity.

Freeport CEO Richard Adkerson said the price of copper could double overnight, but they couldn't add significant production for several years.

Teck Resources

Einhorn likes Teck Resources more than Freeport for several reasons. He describes it as an overlooked Canadian miner. Teck's Class B shares are listed in Toronto and on the New York Stock Exchange. The company trades at two-thirds of Freeport's PE multiple and has much better growth prospects. Teck shares had done well this year but underperformed Freeport.

Teck is more of a diversified miner, as it produces metallurgical coal, zinc and copper. Unlike Freeport, Teck is undergoing a significant copper mining expansion project in Chile, and it owns half of that project, called QB2, which will come online in the second half of next year.

Teck underwrote the project at a copper price of $3 per pound, but David says the forward price is around $4.50, so the returns will be better than initially expected. If holding to Goldman's bull case for copper at $6.80 per pound, the expansion project itself would be worth Teck's entire market capitalization even though it won't contribute to the company's bottom line until 2023.

Why Einhorn likes Teck

The new project will reshape Teck's business toward copper, and the company has five other copper projects it wants to either sell or partner with someone else who wants to put in capital to develop them.

Management estimated the value of those projects at C$3 billion in 2017 when copper was at $2.70 per pound. After QB2, Teck will expand further with QB3, which will come online in 2030 and double QB2's production capacity, making it a top-five copper mine globally.

Metallurgical coal is currently Teck's largest product today. Analysts expect the supply and demand to remain balanced, but Einhorn believes it could fall into a deficit in the near term. Met coal is different from thermal coal, which is being targeted for its carbon emissions. However, there is no substitute for met coal, which means that we have to burn met coal if we want steel.

Like most commodities, met coal has also increased this year, rising to $175 per metric ton, although most analysts estimate $150 per ton. Met coal has gone through supply-driven shortages in the past, like when flooding in Queensland drove prices above $300 a ton in 2010. If the commodity went to $300 again, Teck would generate over $1 billion of incremental EBITDA per quarter.

Analyzing Teck's earnings

Teck earned 61 cents per share in the first quarter; it is forecast to earn $3.23 per share for the entire year at the current copper curve and with met coal at $150 per ton. The company trades at 9.6 times 2021 earnings, and he expects it to beat consensus, which hasn't adjusted to recent commodity prices.

When QB2 comes online, he expects upside earnings surprises. Teck could report earnings of $4.40 per share in 2023. David expects depreciation to exceed capital spending, resulting in higher free cash flow per share so that the company could trade at 4.6 times cash flow at $4.50 per pound of copper. Teck doesn't have any debt coming due until 2030, and management has said that when QB2 comes online, they will return their free cash flow to shareholders.

With $3 copper, which was the price before the recent commodity run, Teck shares are worth C$40, and with C$4.50 copper, Einhorn sees them as worth $59. At Goldman's bull case of $6.80 per pound, Teck's shares would be worth almost $90 per share.


I am the founder and CEO of ValueWalk. What started as a hobby ten years ago, has turned into a well known financial media empire with millions of monthly visitors

I am the founder and CEO of ValueWalk. What started as a hobby ten years ago, has turned into a well known financial media empire with millions of monthly visitors focusing in particular on simplifying the opaque world of hedge fund world. Before doing ValueWalk full time, I worked as an equity analyst first at a micro-cap focused private equity firm, as well as an analyst at a small/mid-cap value-focused research shop. After that, I worked in business development for hedge funds. I live with my wife and four kids in Passaic New Jersey.

Full Disclosure: I only invest in broad-based ETFs and mutual funds. I no longer purchase equities to avoid even the appearance of a conflict of interest.