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Metal markets in 2021

Copper-exposed equities may see a rise in 2021 as tailwinds align.

Copper-exposed equities might see a spike in 2021, with a buying opportunity just around the horizon, according to Morgan Stanley analysts on Monday.

Copper prices HG00, +0.13 percent rose towards the close of last year and into 2021, reaching $3.696 per pound, their highest level since 2013, after falling to four-year lows in March 2020. Copper-exposed stocks have benefited from the rebound, but Morgan Stanley believes there is still more to come.

Despite average total shareholder returns of roughly 63 percent since the beginning of 2020, equity analysts at the investment bank said they still saw a good risk-reward for copper-exposed stocks.

They highlighted a variety of tailwinds, including an improving economy.

“As a result, we suggest that there is a further 30% upside to current share prices if spot commodity prices hold through 2021,” they said in a note.

Another reason to be optimistic was copper's position in the worldwide transition to a lower-carbon economy. Its role as a major facilitator of the decarbonization and electrification transition provides a “compelling secular growth angle as investor concern on climate change grows,” according to the analysts.

“Against this context, we would consider any market turbulence over the next month around Chinese New Year as a purchasing opportunity, with a positive 2Q21 view in sight,” they said.

Morgan Stanley favoured mining and commodities trading firm Glencore GLEN, +1.00 percent, base-metals miner Lundin Mining LUN, -1.44 percent, and mining and metals business First Quantum FM, -0.59 percent as top selections for 2021.

They stated that despite last year's high gains, they still saw appealing possibilities due to a "tight fundamental picture that is further bolstered by positive macro factors."

According to experts, Glencore stock has a 67 percent upside, Lundin has a 34 percent upside, and First Quantum has a 31 percent upside based on hypothetical fair values and 2021 earnings based on spot prices. Under Morgan Stanley's copper bull case of $4 per pound, those upsides increased to 93 percent, 61 percent, and 54 percent, respectively.

Glencore, which is listed on the FTSE 100, has an appealing commodities mix with exposure to basic metals and a compelling value, according to the analysts, who rate the company overweight with a price objective of 274 pence. Lundin has the “most compelling turnaround storey” and rerating potential, with improved operational momentum expected to continue in the first half of 2021 and a dividend rise on the horizon. 

Glencore and Lundin also trade at a large discount, providing a value buffer "should metal prices finally fall back," according to the companies, while First Quantum has "adequate valuation headroom."

Analysts said risks were mounting for Antofagasta ANTO, -0.24 percent and Boliden BOL, -0.32 percent, both of which are rated equal-weight, ahead of results. Antofagasta may underperform on cash cost and capex forecast for 2021 owing to foreign exchange headwinds and project reviews, whilst Boliden may boost its capital expectation on projects and “underperform on special dividends.”

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