‘Load Up,’ Says Goldman Sachs About These 3 Metal Stocks

There’s been a lot of buzz lately about the US potentially heading towards a recession this year. That’s a serious issue, and it should prompt investors to start getting creative in portfolio allocation. One idea is to take advantage of growth-oriented sectors – and to start thinking globally for where to find them.

Banking giant Goldman Sachs has done much of the footwork, and the firm’s chief US equity strategist David Kostin has pointed out that China’s pullback from the zero-COVID lockdown policies is likely to ignite a commodities boom. With pundits from the International Monetary Fund and Bloomberg adding their voices – estimating that China will contribute more than 22% of total global economic growth this year – Kostin notes that the metal and mining sectors are best positioned to gain heavily from Chinese demand.

“Metals & Mining stocks stand to benefit from continued China economic growth. China accounts for about half of global demand for industrial metals such as aluminum and copper… US mining companies are not heavily reliant on China as an export market but stand to benefit indirectly from China demand through higher global metals prices,” Kostin explained.

Stock analyst Emily Chieng, one of Goldman’s mining industry experts, is running with Kostin’s lead, and picking out metal stocks that stand to gain in a commodities boom. Using TipRanks, the world’s biggest database of analysts and research, we’ve pulled up the details on three of these stock picks, which are offering up to 60% upside potential.

Cleveland-Cliffs (CLF)

We’ll start with Cleveland-Cliffs, a major producer of flat-rolled steel in the US market, with a diversified portfolio of finished steel products. This company got its start in the mining business, and still operates iron mines in upper Michigan and northern Minnesota, that feed the firm’s steelmaking, metal stamping, tooling production, and tubular production. In addition to its leading position in the flat-rolled steel segment, Cleveland-Cliffs is also a leader in the production of automotive-grade steel products.

Cleveland-Cliffs benefits greatly from its position as a producer of iron ore, and in addition, the company also mines coking coal, with a mining facility in West Virginia and coking facilities, which turn the raw coal into a vital ingredient for steel-making, in West Virginia, Ohio, and Pennsylvania. The company steel and steel products have applications in manufacturing and packaging, as well as the appliance, auto, equipment, construction, and energy industries.

While revenues and earnings have decreased in recent quarters, they have still managed to exceed expectations. In the most recent release, for 1Q23, the company had a top line of $5.3 billion, down 11% from the year-ago period – but the Q1 result beat analyst expectations by $90 million. The bottom line non-GAAP EPS of 11 cents was a far cry from the $1.50 reported in 1Q22, but was a penny better than the forecast.

The company reported total steel sales of 4.1 million tons in Q1, for a year-over-year increase of 14%. The increase in volume sold partially offset a reduction in average net selling price.

In a development that bodes well for the company’s balance sheet, the firm reported $1.65 billion in borrowings under its credit facilities during Q1, and made $1.34 billion in payments against that debt. Cleveland-Cliffs has stated a commitment to paying down short-term revolver debt, and to that end, on April 14, the company announced closure on an offering of unsecured guaranteed notes, to the total of $750 million and due in 2030, at 6.75%. Net proceeds from this offering will be used to repay revolver credit borrowings.

That forms the background for the comments by Goldman Sachs’ Emily Chieng, who says of this company: “We believe fixed-price contract renegotiation at higher levels and line of sight on sequential cost reduction will drive margin improvement for CLF this year versus second half of last year, particularly as natural gas prices sit below our forecasts. Further, we expect volume growth of ~8% versus prior year to be driven by automotive end markets on improving supply chain efficiencies, low dealer inventories, and healthy consumer backlogs. While CLF has made progress on improving its balance sheet last year, we continue to expect a focus on deleveraging and remain focused on share buybacks.”

Chieng complements her comments with a Buy rating on CLF shares, and a $24 price target that implies a one-year gain of ~60%. (To watch Chieng’s track record, click here)

Overall, there are 5 recent analyst reviews on record for this stock, and they include 2 Buys and 3 Holds – for a Moderate Buy consensus rating. The stock is priced at $15 and its $22 average price target implies ~47% upside on the one-year horizon. (See CLF stock forecast)

Freeport-McMoRan (FCX)

Now we’ll take a look at Freeport-McMoRan, a straight-out mining firm with a major position in the production of molybdenum, copper, and gold. The company, from its base in Phoenix, Arizona, has extensive mining operations in both North and South America, and operates one of the world’s largest copper and gold mines, the Grasberg mine in Indonesia’s Papua region. Freeport-McMoRan is the world’s largest producer of molybdenum.

Metals prices have been experiencing a surge due to high demand, with copper showing a particularly notable upward trend in recent years. The metal is up 19.5% from a trough last June, and has gained  more than 25% in the last 5 years. Freeport-McMoRan produced 832 million pounds of copper in 1Q23, along with 19 million pounds of molybdenum and 270,000 ounces of gold. The company foresees total consolidated sales this year of 4.1 billion pounds of copper, 79 million pounds of molybdenum, and 1.8 million ounces of gold. In the first quarter of this year, the company realized an average price of $4.11 per pound of copper, $30.32 per pound of molybdenum, and $1,949 per ounce for gold.

Those production and price numbers generated the firm’s total Q1 revenue of $5.39 billion, which was down 18% y/y but came in $140 million better than expected. The non-GAAP EPS of 52 cents was less than half the $1.07 reported in 1Q22, but beat the forecast by 6 cents, or 13%. Freeport-McMoRan is supporting its mining ops with extensive exploration activities; the company’s exploration expense in Q1 was up 29% y/y, to $31 million.

All of this adds up to a clear buying opportunity, in the eyes of Goldman’s Chieng, who writes: “We continue to view FCX favorably on consistent operational execution, leverage to copper price upside, and medium-to-long term brownfield growth optionality, and maintain our 12-month price target at $47.”

Chieng’s Buy rating on the stock, and her $47 price target, suggest a 27% upside potential for the year ahead.

Overall, FCX gets a Moderate Buy rating from the analyst consensus, based on 12 recent reviews that include 6 Buys, 5 Holds, and 1 Sell. The shares are priced at $36.87, and their one-year average price target of $46.67 implies a potential gain of ~27%. (See FCX stock forecast)

Alcoa (AA)

Last on our list of Goldman metal/mining picks is a name that may be familiar: Alcoa, based in Pittsburgh, Pennsylvania, is a perennial member of the global ‘top 10’ in aluminum producers, and is known for its production of high-end primary aluminum, fabricated aluminum, and alumina products. Alcoa’s aluminum end products are found a wide range of products and industries, from automobiles and bicycles to airplanes and spacecraft, and even to such everyday items as home appliances and cookware.

The company has felt pressure from the usual macroeconomic headwinds, in the form of high inflation and interest rates, along with supply chain disruptions, combining to increase the cost of production. At the same time, Alcoa has remained profitable – and has even achieved its industry’s lowest carbon footprint.

The effects of this can be seen in Alcoa’s recent 1Q23 earnings release, and in its outlook for Q2. The company had a Q1 top line of $2.67 billion, down almost 19% year-over-year and missing the forecast by $90 million. The bottom line EPS, in non-GAAP terms, came to a net loss of 23 cents per share – where the Street had expected a break-even. Looking ahead, Alcoa is expected a $115 million increase in the cost of energy and raw materials to offset an expected increase in the realized third-part prices of both alumina and aluminum.

In some positive notes, the company’s EBITDA passed $1 billion in 1Q23, setting a company record, and Alcoa finished the quarter with a solid cash balance of $1.1 billion, giving the company deep pockets to withstand an difficult economic situation.

Goldman’s Chieng is bullish on Alcoa, seeing the company as more than capable of expanding its business despite the headwinds. Putting her thoughts in a recent note, she writes: “We continue to view AA positively, driven by (1) ~9% aluminum volume growth in the next two years (driven by production restarts) and (2) the company’s leverage to aluminum price upside which remains the more important driver of the company’s earnings profile; specifically, on our ~$2,700/t assumption for 2023, we estimate that the aluminum segment comprises ~75% of attributable EBITDA.”

Quantifying her stance, Chieng gives Alcoa stock a price target of $54 alongside a Buy rating; this implies an upside of 51% on the one-year time frame.

Even though the Goldman view is bullish here, Wall Street is taking a more cautious approach. Alcoa shares have a Hold rating from the analyst consensus, based on 8 reviews that include 3 Buys, 4 Holds, and 1 Sell. However, the stock’s $35.83 trading price and $47.75 average price target suggest a one-year upside potential of 34%. (See Alcoa stock forecast)

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
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