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ASX mining shares dip as sentiment towards hard commodities turns bearish, but leading broker urges investors to buy this group of S & P / ASX 200 Index (Index: ^ AXJO) mining stocks.
These ASX miners are exposed to aluminum and the outlook for the metal is bright, according to Morgan Stanley.
Not that you can tell today. The sale is blind and even the price of aluminum has not been spared.
Why this could be a buying opportunity for some ASX 200 shares
The bears really focus on the iron ore, as the steel ore sinks deeper into the bears’ territory.
Base metals are also declining in sympathy even though the engines are different from the bulk commodity.
But it is during these “sell everything” events that the best buying opportunities emerge.
Bullish outlook for aluminum
This time may not be any different, especially for aluminum, as it is decoupled from the cost curve after more than a decade.
“Historically, when it has deviated significantly from the cost curve, we find that the price stays high above the 90th percentile for about 2-3 years,” Morgan Stanley said.
“With the current break starting at the end of 2020, this could show that higher prices could be held for some time.”
ASX 200 stock upgrade cycle exposed to aluminum
Several fundamental factors are also supporting the price of aluminum. Global metal supply is tight as downstream demand remains strong. This leads to a limited local inventory of the commodity and the high global freight prices are not helping.
It turns out that China could also provide tailwind for aluminum. This contrasts with the iron ore where China is blamed for the crash.
“More recently, some additional factors have added to this bullish outlook, including further cuts in production by domestic smelters in China in September due to power outages, rising electricity costs in China and the surge in costs due to rising alumina prices (due to supply disruption), ”added Morgan Stanley. .
Best ASX 200 mining stocks to buy now
The ASX 200 mining stock most exposed to the rise in aluminum is the South32 Ltd (ASX: S32) share price.
At the current spot price, South32’s aluminum activity will represent around 38% of the group’s turnover.
“By running ali cash only, the valuation stands at A / sh $ 3.90,” Morgan Stanley said.
“And the FY22 FCF spot yield stands at 12%, showing that S32 is well positioned to return capital to shareholders.”
The broker recommends the South32 share price as “overweight”.
Another minor who will benefit is the Rio Tinto Limited (ASX: RIO) share price. Aluminum will contribute approximately 24% of total CY22 sales at spot price.
However, as it derives most of its cash from iron ore, Morgan Stanley retains its “peer-to-peer” rating on the Rio Tinto share price.
This leaves the Limited alumina (ASX: AWC) the share price as the only other buy-listed share on the broker’s list. But Alumina will not benefit as much as South32 from rising aluminum prices, as it derives most of its revenue from alumina and not from aluminum.