Commodity prices are soaring amid buoyant demand and the loss of supply created by the Russia-Ukraine war. The S&P GSCI Index of commodity prices has jumped 29% so far this year.
This climb has Goldman Sachs bullish on European mining stocks. “We are bullish into the first quarter reporting season and forecast the EU [European Union] mining sector generating record cash flows in first half of 2022,” Goldman analysts wrote in a commentary.
“Our optimism extends beyond first-quarter earnings: a multi-year unprecedented bull cycle in metals is under way, with most metals in short supply,” they said
That supply shortage stems from supply-chain disruptions, logistical bottlenecks, geopolitical concerns and under-investment in mining for years.
When you add to that continued growth in demand and the transition to clean energy, “this leads us to believe the commodity bull cycle is not temporary and represents a new normal,” the analysts said.
Company valuations don’t reflect the bullish commodity outlook, they said. The EU mining sector is trading at about a 20% 2022 free-cash flow, a 10% discount from its historical mid-cycle yield. The strategists anticipate valuations will rebound.
The Fabulous Five
Goldman has five buy-rated stock ideas to take advantage of the trend:
· the U.K.’s Rio Tinto (RIO)
· Switzerland’s Glencore (GLNCY)
· Norway’s Norsk Hydro (NHYDY)
· the U.K.’s Anglo American (NGLOY)
· Canada’s Lundin (LUNMF) (it’s not clear why Goldman chose a Canadian company as part of its list, though Lundin does have mining operations in Europe).
As for Rio Tinto, it benefits from a “favorable commodities mix: iron ore and base metals,” the analysts said. “Its top line also benefits from volume growth.” The company’s recent offer for Canadian miner Turquoise Hill Resources (TRQ) is “a strategic positive,” the analysts said. And Rio has an attractive valuation, they said.
Turning to Glencore, “favorable commodity exposure supports the strongest EBITDA [earnings before interest, taxes, depreciation and amortization] momentum in our EU Mining coverage,” the analysts said. The company will likely enjoy record earnings this year, they said. And they see Glencore returning about 80% of its market capitalization by 2025.
Aluminum is Goldman’s Favorite
Looking at Norsk Hydro, “aluminium remains our favorite commodity into 2022,” the analysts said. Norsk Hydro has about 90% exposure to aluminium and 2 times earnings leverage to aluminium prices, they said. It also has “solid cost control.” And the analysts see Norsk as well positioned with its green investments.
Anglo American “is a well-run business with a strong balance sheet, delivering above-peer volume growth,” the analysts said. It has “diversified exposure to metals with favorable pricing fundamentals.” That includes copper, iron ore and metallurgical coal. Anglo also has a “discounted” valuation, the analysts said.
Lundin represents “a highly levered copper pure-play, which should benefit from copper’s expected rise to $15,000 per tonne,” the analysts wrote. The metal recently traded at $10,235. “New volume growth options are on the table,” the strategists added. Also, “the company’s net cash position could prompt higher shareholder returns,” they said. And it has an "attractive" valuation.
