Copper-exposed stocks could rise in 2021 and there may be a buying opportunity at the door, Morgan Stanley analysts said Monday.
Copper prices HG00,
rose to $ 3,696 per pound late last year – its highest level since 2013, after falling to four-year lows in March 2020. Stocks exposed to copper have enjoyed the recovery, but Morgan Stanley said there are more to come.
Despite the average total shareholder return of nearly 63% since early 2020, the investment bank’s equity analysts said they still see positive risk reward for copper-exposed stocks.
They cited a number of windfalls, including an accelerating economic cycle and expected reflation, which “strongly favors copper”.
“As such, we argue that there is an additional 30% upward from current stock prices if commodity prices hold up through 2021,” they said in a note.
Read: This is what industrial metals face after the 2020 rally for steel, iron ore and copper
Copper’s role in the global shift to a low-carbon economy was another reason to be positive. Its position as a key driver for decarbonization and electrification transition provides “compelling secular growth as investors’ focus on climate change continues to grow,” the analysts said.
“Against this backdrop, we would use the potential market volatility around Chinese New Year over the coming month as a buying opportunity with a bullish 2Q21 outlook in sight,” they added.
When it comes to top picks for 2021, Morgan Stanley preferred mining and commodity trading giant Glencore GLEN,
base metal miner Lundin Mining LUN,
and mining and metals company First Quantum FM,
They said that despite strong gains last year, they still saw attractive opportunities as “a tight fundamental picture is further reinforced by bullish macro drivers”.
According to the analysts’ assessment using hypothetical fair values and spot price earnings for 2021, Glencore shares were up 67%, Lundin up 34% and First Quantum up 31%. Under Morgan Stanley’s $ 4 a pound copper bull case, those gains rose to 93%, 61%, and 54%, respectively.
The FTSE 100-listed Glencore has an attractive commodity mix with exposure to base metals and an attractive valuation, they said, rating the stock overweight with a price target of 274 pence. Lundin has the “most compelling turnaround story” and reliving potential with improved operational momentum to continue into the first half of 2021, and a potential dividend hike just around the corner. First Quantum would also benefit from the “broader recovery in copper demand after COVID” and its proactive cash management.
Read: Commodity bull market? “This ship has sailed,” says Goldman’s Currie
Glencore and Lundin also trade at a significant discount, providing a valuation buffer “should the metal price eventually decline,” they said, while First Quantum also has “plenty of room for valuation”.
The analysts said risks were emerging for Antofagasta ANTO,
and Boliden BOL,
– both of equal weight – before the upcoming income. Antofagasta could disappoint on 2021 cash costs and capex expectations due to headwinds on currency movements and project appraisals, while Boliden could raise its capex project outlook and “underwhelm on special dividends.”