As the world begins effectively to fight back against the COVID-19 pandemic, investors and analysts are expecting a revitalized economy that will put more people back to work and increase demand for the materials used in the construction, electronics and auto industries. In every case, those industries demand varying amounts of components that must be pulled out of the ground.

Analysts at Morgan Stanley recently reviewed copper and aluminum producers based in the western hemisphere, including six U.S.-traded miners. Here’s a look at how Morgan Stanley looks at the entire mining space along with rating price targets on specific companies.

The analysts say they “continue” to favor mining equities because the stocks are “well-positioned to benefit from a still-improvement macro and electrification/green trends.” One thread of that story, of course, is a proposed $3 trillion infrastructure/green tech proposal in the United States. Morgan Stanley’s analysts say mining industry stocks remain “under-owned” and the equities’ “valuation looks attractive,” with the S&P metals and mining index trading about one standard deviation below the historical enterprise value-to-EBITDA multiple relative to the S&P 500.

That said, Morgan Stanley now prefers more exposure to aluminum given the metal’s “more direct link to emissions cuts in China” because the country’s carbon control policies are “likely to have longer-term implications for the aluminum market (which accounts for ~5% of overall carbon emissions in China).”

Compared to copper, aluminum is the current clear winner:

On aluminum, the team expects the 45 [million metric ton] capacity cap to remain in place and coal-fired power costs to rise, leading demand to outpace supply by 2023. On copper, the team sees mine supply growth outpacing strong demand in the next 1-2 years, presenting downside risk to prices in 2022-23. … [M]arket drivers have been almost universally positive through 1Q21, supported primarily by a consumer and manufacturing-led global recovery, speculative inflows, limited supply growth, and disrupted shipping. However, [there are] signs the rally could be nearing its peak: rising rates and a stronger USD could dampen speculative buying, high prices are beginning to impact demand, China’s infrastructure [fixed asset investment] and construction starts are slowly softening on the back of credit tightening, and supply is recovering.

Overall, Morgan Stanley prefers aluminum to copper and sees metallurgical coal as a top pick as demand outside of China picks up. The analysts are bearish on iron ore and nickel, but the demand from EV and electronics makers is keeping demand strong for cobalt and lithium. Yet, after a run of nearly two years, the analysts remain bearish on gold as rising real yields and a stronger dollar add downside pressure on the yellow metal.

BHP

BHP Group PLC (NYSE: BBL), with a market cap approaching $145 billion, is the largest mining company in the world based on market value. The Australia-based firm is an extractor of petroleum, copper, iron ore and coal.

Morgan Stanley cut its rating on the stock from Overweight to Equal Weight. The stock trades at around $56.50, in a 52-week range of $28.90 to $67.03. The consensus price target is $77, implying a potential gain on the shares of around 35%. BHP pays an annual dividend of $3.12 (for a yield of 5.57%).

Vale S.A. (NYSE: VALE) is a Brazilian miner primarily of iron ore and nickel, along with other ferrous metals and byproducts like copper, gold, silver and cobalt, among others. The company’s market cap is $87.3 billion.

Morgan Stanley cut its rating on the stock from Overweight to Equal Weight and raised its price target from $19 to $21 per share. The stock currently trades at $17, indicating a potential upside to the consensus target of $22.08 of around 30%. The stock’s 52-week range is $7.36 to $19, and Vale pays an annual dividend of $1.19 for a yield of 7.15%.

Southern Copper

Phoenix-based Southern Copper Corp. (NYSE: SCCO) is a copper miner with operations in Mexico and Latin America. The company is majority-owned by Grupo Mexico, and its market cap is around $53.7 billion.

The Morgan Stanley analysts have an Underweight rating on the stock, with a price target of $63, which is in line with the consensus target of $62.25. Shares currently trade at around $69.50, more than 10% above the consensus target. Southern Copper pays an annual dividend of $2.40 for a yield of 3.52%.

Freeport-McMoRan

Freeport-McMoRan Inc. (NYSE: FCX) is also based in Phoenix. The company primarily mines copper and gold in Indonesia, Chile and the United States. Freeport’s market cap is around $48.3 billion.

Morgan Stanley has cut its rating on the shares from Overweight to Equal Weight with a price target of $38. In the company’s favor, according to the analysts, is its outperformance over the past five years, two years and one year, along with “reduced uncertainties” in the transition of Indonesia’s Grasberg mine from open pit to underground operations.

The consensus price target on the stock is almost $37, about 12% higher than the current trading price of around $33.25. Freeport announced Wednesday morning that it will begin paying an annual dividend of $0.30 per on May 3 ($0.075 per quarter), after suspending its dividend last year.

Alcoa

Alcoa Corp. (NYSE: AA) is based in Pittsburgh and has a market cap of around $5.6 billion. The company’s mining operations are located in the United States, Australia, Brazil, Canada and Spain.

Morgan Stanley raised its rating on Alcoa from Equal Weight to Overweight and lifted the price target on the stock from $20 to $43 a share. Alcoa stock already trades above the consensus target of $28.73, at about $30.10. Morgan Stanley’s new price target is the stock’s highest and implies a potential upside on the shares of 43%.

Get Our Free Investment Newsletter

I have read, and agree to the Terms of Use

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.