Visitors pass a logo of Teck Resources Ltd mining company during the Prospectors and Developers Association of Canada (PDAC) annual convention in Toronto, Ontario, Canada March 4, 2019.CHRIS HELGREN/Reuters
Morgan Stanley analysts are predicting a rebound in global economic growth and manufacturing activity that will benefit base metals prices and miners everywhere, and they believe Canada’s Teck Resources Ltd. will be one of the most lucrative ways to benefit from the trend.
Early signs of a recovery in the factory sector make the forecast all the more compelling.
Chetan Ahya, Morgan Stanley’s chief global economist, expects the recovery in key global indicators such as purchasing manager surveys will gain momentum, and this is very good news for base metals miners.
“A [first quarter] recovery is on the cards: Global growth should recover … as trade tensions and monetary policy are easing simultaneously for the first time since the downtrend began," the analyst said in a report this week titled 2020 Global Macro Outlook: The Late-Cycle Expansion Extends.
The first accompanying chart shows a close relationship between resource prices – as measured by the BMO Equal Weight Global Base Metals Hedged to CAD Index ETF – and global manufacturing activity.
resource watch
BMO Equal Weight Global Base
Metals Hedged to CAD Index ETF
JPMorgan Global
Mftg. PMI
$80
55
54
70
53
60
52
50
51
40
50
30
49
20
48
10
47
0
46
2018
2017
2014
2015
2016
2019
JPMorgan Global
Manufacturing
Teck Resources
55
$40
54
35
53
30
52
25
51
20
50
15
49
10
48
5
47
0
2018
2017
2014
2015
2016
2019
JOHN SOPINSKI/THE GLOBE AND MAIL
SOURCE: scott barlow; bloomberg
resource watch
BMO Equal Weight Global Base
Metals Hedged to CAD Index ETF
JPMorgan Global
Mftg. PMI
$80
55
54
70
53
60
52
50
51
40
50
30
49
20
48
10
47
0
46
2018
2017
2014
2015
2016
2019
JPMorgan Global
Manufacturing PMI
Teck Resources
$40
55
35
54
30
53
25
52
20
51
15
50
10
49
5
48
0
47
2018
2017
2014
2015
2016
2019
JOHN SOPINSKI/THE GLOBE AND MAIL
SOURCE: scott barlow; bloomberg
resource watch
BMO Equal Weight Global Base
Metals Hedged to CAD Index ETF
JPMorgan Global
Manufacturing PMI
$80
55
54
70
53
60
52
50
51
40
50
30
49
20
48
10
47
0
46
2018
2017
2014
2015
2016
2019
JPMorgan Global
Manufacturing PMI
Teck Resources
$40
55
35
54
30
53
25
52
20
51
15
50
10
49
5
48
0
47
2018
2017
2014
2015
2016
2019
JOHN SOPINSKI/THE GLOBE AND MAIL, SOURCE: scott barlow; bloomberg
The blue line on the chart represents the JPMorgan Global Manufacturing PMI, a composite index. This benchmark compiles national surveys of manufacturing executives who answer a series of questions regarding trends in hiring, business activity and orders for new goods. Readings above 50 indicate growth (as of Oct. 31, the last data point, it stood at 49.8).
The metals ETF has stabilized since the PMI bottomed in July and began recovering. Investors should always remember that “correlation does not equal causation” when looking at charts like these, but subjectively it makes perfect sense that rising manufacturing activity has lifted demand and prices for related commodities.
In a Nov. 19 report, Morgan Stanley mining analyst Carlos De Alba noted the significant profit potential in the current global economic environment. When the U.S. manufacturing PMI (not shown on chart) drops below 48, as it did in September, and a recession did not follow in subsequent months, the
S&P Metals and Mining index significantly outperformed the S&P 500, on average, in the following 12 months.
Mr. De Alba highlighted Teck, along with U.S.-based Freeport-McMoRan Inc., as stocks best positioned to benefit from the recovery in the mining industry. The analyst highlighted Teck’s strong balance sheet and strong copper production growth outlook as primary reasons.
The second chart compares Teck’s performance to the global PMI. The relationship is less close than between PMIs and commodity prices, but the stock price did peak just after the index in early 2018, and can be expected to follow PMIs higher.
Morgan Stanley’s base case is for copper prices to average US$3 a pound in 2020, and metallurgical coal prices average US$141 a tonne, which gives Teck a target price of $28.63 next year. The stock is currently trading just under $21, so the target price implies a return of more than 35 per cent in 2020.
Morgan Stanley’s view is rosy, but a position in Teck is not without risk. A global economy that fails to recover in 2020 would likely result in losses. Furthermore, on Thursday, Bank of Montreal analyst Jackie Przybylowski downgraded the stock to “market perform” from “outperform” on fears of low coal production. Ms. Przybylowski‘s stock price target, however, remains much higher than Morgan Stanley’s, at $37.
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Scott Barlow