5 ASX miners Morgan Stanley believes are undervalued

The ASX is a major borse for some of the world’s largest materials companies, the sector also making plenty of headlines lately with a ramp-up of M&A activity. Today, the ticker of one of Australia’s best-known miners, Oz Minerals (ASX: OZL), will flash on the boards for the final time before it’s absorbed into BHP Group (ASX: BHP).

Both companies are mentioned in the below snapshot, which provides insights into how Morgan Stanley equity analyst Rahul Anand, CFA feels ahead of the upcoming quarterly production reports from Australian miners.

His broad view of the sector includes risks to margins for “uncontracted tonnes” at lithium producers Mineral Resources (ASX: MIN) and Pilbara Minerals (ASX: PLS).

“The largest production uplifts are needed at AKE, SFR, NST, and NCM,” he says.

Anand is watching for updated guidance and further outlooks on the weather-affected operations at 29M, NST and EVN. He’s also expecting project updates from a raft of others including BHP, Rio Tinto and Fortescue Metals.

In the following article, I’ve detailed a handful of the miners currently trading at a discount to Anand’s price targets.

Whitehaven Coal (ASX: WHC)

Rating: OVERWEIGHT

Price target: $9.75

Of the 20 miners covered in the latest report, Morgan Stanley equity analyst Rahul Anand, CFA, holds the strongest conviction on thermal and metallurgical coal producer Whitehaven, which operates mines in New South Wales and Queensland.

He believes the stock currently presents more than 40% upside, based on its latest closing price of $6.93.

“Our base case value reflets higher costs and capex for FY23, to account for the stickiness in inflation,” Anand says.

“Even so, we think the stock remains significantly cheap and is also supported by healthy dividend and buyback yield.”

Ahead of the March quarter update, Anand also notes that further news on the anticipated 2024 final investment decision on WHC’s Vickery and Winchester South projects in NSW and QLD could boost the share price further.

Allkem (ASX: AKE)

Rating: OVERWEIGHT

Price target: $13.75

The Argentina-based lithium producer was trading at a 13% discount to Morgan Stanley’s price target on Tuesday, when the stock closed at $12.06.

“We view AKE’s operating assets and growth pipeline as high quality,” says Anand.

“The stock price has followed lithium prices lower recently and we now see the stock as undervalued.”

Syrah Resources (ASX: SYR)

Rating: EQUAL WEIGHT

Price target: $1.80

A heavyweight of global graphite production – a battery metal on which my colleague Kerry Sun recently wrote a comprehensive report – Syrah’s share price is down more than 30% since late January.

Updates on the detailed feasibility study for the expansion of Syrah’s Vidalia graphite production facility in Louisiana, US is one of the key things Anand is watching for in the upcoming quarterly report.

He also calls out Syrah’s Balama graphite operation in Mozambique, which has faced multiple closures due to industrial action and security concerns since last September.

“While the restart of Balama is a positive, we see there is currently a lack of clarity on the price realisation, production and operating costs,” says Anand.

Based on Tuesday’s $1.61 closing price, Syrah is currently trading at an 11% discount to Morgan Stanley’s price target.

South32 (ASX: S32)

Rating: OVERWEIGHT

Price target: $4.90

The diversified miner, which was spun out of BHP in 2015, is expected to provide important updates about its Brazil Alumina operation when it delivers the March quarter production report.

“Watch out for any production disruptions due to low coal stocks in the Australian operations,” says Morgan Stanley’s Anand.

He’s also watching for commentary around the company’s costs, on the back of price moves in raw materials and energy.

“The majority or S32 assets are well-positioned in the global cost curve. S32 continues to generate significant cash, enabling strong shareholder returns and buybacks,” Anand says.

With a closing price of $4.43 on Tuesday, the company currently trades around 10% below Anand’s price target.

Alumina (ASX: AWC)

Rating: OVERWEIGHT

Price target: $1.70

With a 40% stake in Alcoa World Alumina and Chemicals (AWAC), the firm invests in bauxite mining and alumina refining and smelting.

“AWAC’s first-quartile cost curve position keeps the company profitable through the cycle, and means there is limited through-the-cycle financial risk, despite exposure to fluctuating commodities,” says Anand.

AWC’s $1.58 closing price on Tuesday sees it trading at a 7% discount to the Morgan Stanley price target.