These 2 stocks are set to soar
The returns from these two aluminium and tin stocks could be spectacular when the commodity cycle turns says David J Stevenson.
Resource stocks soared earlier in the year as commodity prices jumped, but prices have deflated as demand concerns have taken over. However, this could be an opportunity for investors who can take advantage of depressed valuations in the sector.
These 2 resource stocks look cheap with huge potential.
The resource market opportunity
Aluminium has many useful qualities. It is plentiful (and thus cheap), durable and conductive yet malleable and lightweight.
Yet aluminium has slumped in 2022. Demand has softened as China, a key consumer, struggles to recover from ongoing Covid-19 curbs.
However, global demand for aluminium will grow by almost 40% by 2030, says a study by business analysts CRU International for the International Aluminium Institute.
Contrarians know that when adverse sentiment dissipates, prices will whipsaw higher as investors focus on the metal’s long-term positives.
Undervalued aluminium giant
One play on a major rebound in the aluminium cycle is Alcoa (NYSE: AA). With a market value of $7.5bn, it is one of the world’s biggest bauxite miners. It has high-quality reserves and is among the 25% of companies in the industry with the lowest costs.
It has access to bauxite reserves at seven global mines, including two in Australia, two in Brazil, one in Guinea and another in Saudi Arabia.
Alcoa also operates the world’s largest third-party alumina (aluminium oxide) business: its portfolio of seven refineries across the world works from a highly competitive cost position as well as the industry’s lowest average carbon-intensity footprint.
The group’s aluminium division includes smelting, casting, and energy assets. Alcoa is a leading producer of primary aluminium products (billet, foundry, rod and slab) and has a portfolio of patented cast alloys as well as low-carbon aluminium.
The company’s energy portfolio, which includes partnerships and wholly-owned assets, supplies power internally and generates revenue from third-party sales.
The latest set of results confirmed that trading is tough. Despite revenue of $2.85bn, Alcoa recorded a net loss of $746m for the quarter to the end of September 2022, including $652m of restructuring charges and a loss per share of $4.17.
That is reflected in the 55% plunge in the stock price since March. Yet the balance sheet remains strong and earnings will recover when aluminium does.
Analysts’ estimates for next year put Alcoa on a forward price-to-earnings (p/e) ratio of 10, dropping to 7in 2024.
A vital metal for the green transition
The other metal investors should consider is tin.
In alloy form, tin is highly conductive. Its largest (49%) application is in solders, which act as both glue and conductor between individual electronic components as well as between components and printed circuit boards.
Indeed, the Massachusetts Institute of Technology deems tin the most crucial metal to new technologies and the energy transition, well ahead of cobalt and lithium, and with more than twice the number of uses of nickel.
Again, tin has tumbled this year. Fears have emerged about the reduced use of tin, along with the substitution with cheaper materials.
Yet future demand for tin from lithium-ion batteries is forecast to rise from almost zero to 3%-4% of overall use by 2025 as electric vehicles (EVs) replace internal combustion engine-powered transport, says Edison Investment Research.
High risk but potentially high reward
One stock to consider is Alphamin Resources (TSXV: AFM), a low-cost tin concentrate producer from its Mpama North deposit in the DRC.
Mpama North is the world’s highest-grade tin resource, with a grade about four times higher than most other operating tin mines. Alphamin produces some 4% of the planet’s mined tin.
The company’s shares are listed on Canada’s Venture Exchange. It reports in US dollars: the market capitalisation is $600m. The group’s aim is to become one of the world’s largest sustainable tin producers.
In addition to drilling for resource extensions at Mpama North and nearby Mpama South, it is exploring for more tin deposits.
In its October 2022 update, Alphamin confirmed that third-quarter tin production was ahead of market guidance at 3,139 tonnes. The firm’s earnings before interest, tax, depreciation and amortisation (Ebitda) estimate was $30.1m, which represents a 44% Ebitda margin at a tin price of $22,011/tonne.
The all-in-sustaining cost (AISC, a gauge of the expense of sustaining current mining operations) per tonne of tin sold was 10% lower than in the prior quarter.
Tread carefully: the DRC is widely viewed as politically unstable. Yet the stock has halved in six months. On a 2022 p/e of 4, it is very cheap.
For those who can stomach volatility, it offers a high-risk but potentially high-reward way of playing the tin price.