ASX mining shares are plunging as sentiment towards hard commodities turn bearish, but a top broker is urging investors to buy this group of S&P/ASX 200 Index (Index:^AXJO) mining shares.
These ASX miners are exposed to aluminium and the outlook for the metal is shining bright, according to Morgan Stanley.
Not that you can tell today. The sell-off is indiscriminate and not even the aluminium price was spared.
Why this could be a buying opportunity for some ASX 200 shares
The focus of the bears is really on iron ore as the steel making mineral sinks deeper into bear territory.
Base metals are also falling in sympathy even though the drivers are different from the bulk commodity.
But it's during these "sell everything" events that the best buying opportunities emerge.
Bullish outlook for aluminium
This time may be no different, especially for Aluminium as it's delinked from the cost curve after more than a decade.
"Historically, when it has broken away significantly from the cost curve, we find that price remains elevated above the 90th percentile for ~2-3 years," said Morgan Stanley.
"With the current break starting late 2020, this could show that higher prices could be sustained for some time to come."
Upgrade cycle for ASX 200 shares exposed to aluminium
There are several fundamental factors that are supportive of the aluminium price too. Global supply for the metal is tight as downstream demand remains strong. This is leading to limited local inventory of the commodity and high global freight prices aren't helping.
It turns out that China could also be providing a tailwind for aluminium. That stands in contrast to iron ore where China is blamed for the crash.
"More recently, some additional factors have added to this bullish outlook, including additional China domestic smelter production cuts in Sept due to power cuts, rising Chinese power costs, and cost push from rising alumina price (supply disruption driven)," added Morgan Stanley.
Best ASX 200 mining shares to buy now
The ASX 200 mining share that is most exposed to the aluminium upside is the South32 Ltd (ASX: S32) share price.
At the current spot price, South32's aluminium business will account for around 38% of group revenue.
"Running ali only at spot, valuation sits at A$3.90/sh," said Morgan Stanley.
"And spot FY22 FCF yield sits at 12%, showing S32 is well placed to return capital to shareholders."
The broker is recommending the South32 share price as "overweight".
Smaller beneficiaries
Another miner that will benefit is the Rio Tinto Limited (ASX: RIO) share price. Aluminium will contribute around 24% to total revenue in CY22 at spot price.
However, as it makes most of its cash from iron ore, Morgan Stanley is keeping its "equal weight" rating on the Rio Tinto share price.
This leaves the Alumina Limited (ASX: AWC) share price as the only other buy rated stock on the broker's list. But Alumina won't benefit as much as South32 from rising aluminium prices as it makes most of its income from alumina and not aluminium.
