These 2 stocks are poised to soar
Resource stocks soared earlier in the year as commodity prices soared, but prices deflated as demand concerns took hold. 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
Aluminum has many useful qualities. It is plentiful (and therefore cheap), durable and conductive yet malleable and light.
Yet aluminum has fallen in 2022. Demand has weakened as China, a key consumer, struggles to recover from current Covid-19 restrictions.
However, global aluminum demand will increase by almost 40% by 2030, according to a study by trade analysts CRU International for the International Aluminum Institute.
Opponents know that when negative sentiment dissipates, prices will rise as investors focus on the metal’s long-term positives.
Undervalued Aluminum Giant
A play on a major rebound in the aluminum cycle is Alcoa (NYSE: AA). With a market value of $7.5 billion, it is one of the largest bauxite miners in the world. It has high quality reserves and is among the 25% of companies in the sector with the lowest costs.
It has access to bauxite reserves from seven mines worldwide, including two in Australia, two in Brazil, one in Guinea and another in Saudi Arabia.
Alcoa also operates the largest third-party alumina (aluminum oxide) business in the world: its portfolio of seven refineries around the world operates from a very competitive cost position as well as the lowest average carbon footprint weak in the industry.
The group’s aluminum division includes foundry, smelter and energy assets. Alcoa is a leading producer of primary aluminum products (billet, foundry, rod and slab) and has a portfolio of proprietary cast alloys as well as low carbon aluminum.
The company’s energy portfolio, which includes partnerships and wholly-owned assets, provides electricity internally and generates revenue from sales to third parties.
The latest set of results confirmed that trading is tough. Despite revenue of $2.85 billion, Alcoa posted a net loss of $746 million for the quarter to the end of September 2022, including $652 million in restructuring charges and a loss per share of $4.17.
This is reflected in the 55% drop in the share price since March. Still, the balance sheet remains strong and earnings will pick up with aluminum.
Analyst estimates for next year put Alcoa on a price-earnings (p/e) ratio of 10, falling to 7 in 2024.
A vital metal for the green transition
The other metal that investors should consider is tin.
As an alloy, tin is very conductive. Its largest application (49%) is in solders, which act as both a glue and a conductor between individual electronic components as well as between components and printed circuit boards.
Indeed, the Massachusetts Institute of Technology considers tin to be the most crucial metal for new technologies and the energy transition, well ahead of cobalt and lithium, and with more than twice as many uses as nickel.
Again, pewter has fallen this year. Concerns have arisen over the reduction in the use of pewter, as well as its substitution with cheaper materials.
Yet future demand for tin from lithium-ion batteries is expected to grow from nearly zero to 3-4% of global use by 2025 as electric vehicles (EVs) replace internal combustion engine-powered transportation, according to Edison Investment Research.
High risk but potentially high reward
A stock to consider is Alphamine Resources (TSXV: AFM)a producer of low-cost tin concentrate from its Mpama Nord deposit in the DRC.
Mpama North is the richest tin resource in the world, with a grade approximately four times that of most other operating tin mines. Alphamin produces approximately 4% of the planet’s mined tin.
The company’s shares are listed on the Canadian Venture Exchange. It reports in US dollars: the market cap is $600 million. The group’s goal is to become one of the largest producers of sustainable pewter in the world.
In addition to drilling for resource extensions at Mpama North and nearby Mpama South, it is exploring other tin deposits.
In its October 2022 update, Alphamin confirmed that third quarter tin production was ahead of market forecast at 3,139 tonnes. The company’s earnings before interest, taxes, depreciation and amortization (EBITDA) estimate was $30.1 million, representing an Ebitda margin of 44% at a tin price of 22,011 $/ton.
The all-in sustaining cost (AISC, an indicator of the sustaining expense of current mining operations) per tonne of tin sold was 10% lower than the prior quarter.
Be careful: the DRC is widely considered politically unstable. Yet the stock has halved in six months. On a 2022 p/e of 4, it’s very cheap.
For those who can handle the volatility, it offers a high risk but potentially very rewarding way to play the price of tin.