Morgan Stanley takes the wind out of the ASX miners
Morgan Stanley has turned more cautious on two of the ASX’s prominent base-metal miners, downgrading Sandfire Resources (ASX: SFR) from Equal-Weight to Underweight and South32 (ASX: S32) from Overweight to Equal-Weight as part of a broader reassessment of the Australian resources sector.
Analyst Rahul Anand cut Sandfire to Underweight. The move contrasts with the more bullish views of JPMorgan and UBS, which recently upgraded the copper miner with price targets of $25 and $23.30, respectively.
- The downgrade with a $20.35 price target implies approximately 11% downside from Mondays close
With SFR having enjoyed a strong rally alongside copper prices, the downgrade suggests concerns that much of the positive outlook is already reflected in its valuation.
S32 was also downgraded, from Overweight to Equal-Weight, with a $5.20 price target, implying modest upside of approximately 4% from its previous close. The downgrade follows a strong 12-month performance, with the shares gaining ~60%, suggesting Morgan Stanley sees a less compelling risk/reward proposition following the rally.
Operational challenges at its GEMCO manganese operations, where costs have reportedly risen more than 80% following cyclone-related disruption, provide an additional concern.
- Despite the downgrade, Morgan Stanley’s price target remains slightly above the broader consensus of $5.17, and current share price.
These downgrades are consistent with a more selective approach to the resources sector following significant share-price appreciation, rather than a wholesale rejection of the underlying commodity outlook. Morgan Stanley also upgraded Lynas Rare Earths (LYC) to Overweight, reinforcing the view that the broker is rotating its preferences within the sector.
Importantly, Sandfire remains well supported by the broader analyst community, with 15 Buy recommendations compared with just three Sells. We believe the changes are a warning about valuations after strong rallies, rather than evidence of a material deterioration in either company’s fundamentals.
- MM remains long and bullish towards SFR and S32.
