Shares exposed to copper may increase in 2021 and a buying opportunity may be coming, analysts at Morgan Stanley said on Monday.
HG00 copper prices,
rose at the end of last year and in 2021, reaching $ 3,696 per pound – its highest level since 2013, having dropped to a four-year low in March 2020. Shares exposed to copper enjoyed a recovery, but Morgan Stanley said it there was still more to come.
Despite the average total return to shareholders of almost 63% since the beginning of 2020, the investment bank’s stock analysts said they continue to see a positive risk-reward for stocks exposed to copper.
They cited a series of favorable winds, including an accelerating economic cycle and the expectation of reflation, which “strongly favors copper”.
“In this way, we argue that there is an additional 30% increase in current stock prices, should commodity spot prices persist until 2021,” they said in a note.
Read: Here’s what’s in store for industrial metals after the 2020 rally for steel, iron ore and copper
Copper’s role in the global shift towards a low carbon economy was another reason to be positive. Its position as a key facilitator of decarbonisation and electrification transition offers an “attractive secular growth angle, as the investor’s focus on climate change continues to grow,” analysts said.
“In this scenario, we would use the potential market volatility around the Chinese New Year next month as a buying opportunity with an optimistic outlook for 2Q21 in view,” they added.
When it comes to the main options for 2021, Morgan Stanley preferred mining and commodity trading giant Glencore GLEN,
base metals miner Lundin Mining LUN,
and the mining and metals company First Quantum FM,
They said that despite strong gains last year, they still saw attractive opportunities as a “narrow fundamental picture is further driven by bullish macro factors”.
According to analysts’ assessment using hypothetical fair values and 2021 earnings based on spot prices, Glencore’s shares were up 67%, Lundin was up 34% and First Quantum up 31%. According to Morgan Stanley’s defense for $ 4 a kilo copper, these advantages increased to 93%, 61% and 54%, respectively.
Glencore listed on the FTSE 100 has an attractive mix of commodities with exposure to base metals and an attractive valuation, they said, ranking overweight stocks with a target price of 274 pence. Lundin has the “most compelling turnaround history” and potential for reevaluation with enhanced operational momentum set to continue in the first half of 2021 and a possible increase in dividends just around the corner. First Quantum would also benefit from “expanding post-COVID copper demand recovery” and its proactive cash management.
Read: High commodity market? ‘This ship sailed,’ says Goldman’s Currie
Glencore and Lundin are also negotiating at a significant discount, offering a valuation buffer “if metal prices recede”, they said, while First Quantum also has “enough leeway for valuation”.
Analysts said the risks were growing for Antofagasta ANTO,
and Boliden BOL,
– both classified with equal weight – before the next earnings. Antofagasta may disappoint when it comes to 2021 cash cost and capex guidance due to headwinds of foreign exchange and project reviews, while Boliden may increase its prospect of capex in projects and “disappoint with special dividends”