Copper-exposed stocks could be set to surge in 2021 and a buying opportunity may be around the corner, Morgan Stanley analysts said on Monday.
Copper prices HG00, 0.43% rallied at the end of last year and into 2021, hitting $3.696 a pound — their highest level since 2013, having dropped to four-year lows in March 2020. Equities exposed to copper have enjoyed the recovery but Morgan Stanley said there was still more to come.
Despite average total shareholder returns of nearly 63% since the beginning of 2020, the investment bank’s equity analysts said they continue to see a positive risk-reward for copper-exposed equities.
They cited a number of tailwinds, including an accelerating economic cycle and expected reflation, which “strongly favors copper.”
“As such, we argue that there is a further 30% upside to current share prices should spot commodity prices persist through 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 toward a lower carbon economy was another reason to be positive. Its position as a key enabler of decarbonization and electrification transition offers a “compelling secular growth angle as investor focus on climate change continues to grow,” the analysts said.
“Against this backdrop, we would use potential market volatility around Chinese New Year over the next 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 commodities trading giant Glencore GLEN, -1.09%, base-metals miner Lundin Mining LUN, +0.79%, and mining and metals company First Quantum FM, -0.48%.
They said that despite strong gains last year they still saw attractive opportunities as a “tight fundamental picture is further boosted by bullish macro drivers.” Today's Insights. Tomorrow's Implications.
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Under the analysts’ assessment using hypothetical fair values and 2021 earnings based on spot prices, Glencore stock had a 67% upside, Lundin a 34% upside and First Quantum a 31% upside. Under Morgan Stanley’s bull case for copper of $4 a pound, those upsides rose to 93%, 61% and 54% respectively.
The FTSE 100-listed Glencore has an attractive commodity mix with exposure to base metals and a compelling valuation, they said, rating the stock overweight with a price target of 274 pence. Lundin has the “most compelling turnaround story” and rerating potential with improved operational momentum set to continue in the first half of 2021, and a possible dividend hike around the corner. First Quantum would also benefit from the “broadening post-COVID copper demand recovery” 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, offering a valuation buffer “should metal prices eventually pull back,” they said, while First Quantum also has “sufficient valuation headroom.”
The analysts said risks were building for Antofagasta ANTO, +0.53% and Boliden BOL, +0.10% — both rated equal-weight — ahead of coming earnings. Antofagasta could disappoint when it comes to 2021 cash cost and capex guidance due to foreign exchange headwinds and project reviews, while Boliden could raise its capex outlook on projects and “underwhelm on special dividends.”
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