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As a result, investors should be aware that the firm may have a conflict ofinterest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision. For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report. + = Analysts employed by non-U.S. affiliates are not registered with FINRA, may not be associated persons of the member and may not be subject to NASD/NYSE restrictions oncommunications with a subject company, public appearances and trading securities held by a research analyst account. MM Global Metals & Mining Copper...The Stars are Aligned Genuine tightness in 2019-2020. A year of weak grades at majoroperating mines more than offsets limited growth from green andbrownfield projects, resulting in shrinking total mine productionthrough 2019 (MSe -2.4%). Demand growth should slow versus2018, but anything above 0% (MSe 1.6%) is sufficient to tighten themarket, jolting it from its finely balanced state into outright deficit(MSe -380kt). We expect this tightness to emerge from 2Q19 asChina’s demand improves combined with low visible inventories,driving price to USD3.12/lb by year end or 14% upside from spot. Thisis in sharp contrast to other base and precious metals, where we seelow single digit downside, and bulk materials with close to 20%downside. Industry profitability offers upside. EBITDA per ton of USD3,100and post-tax RoCE of c.7% are both below this century’s average andmaterially below recent peaks (real terms, 2017 prices). Rising capitalintensity supports price and EBITDA too. Current profit levels are notenough to support even a 10% IRR on new investments. Technicalinnovation may ease the upward pressures on capital requirementsbut not until 2021 at the earliest we think. Capex is rising but mean- ingful new supply is not due until 2022. Copper equities finally offer appealing risk-reward ratios. Onaverage, the copper sector has de-rated to 6.0x N12M EV/EBITDAversus a recent peak of 9.0x end of 2016 and average of 6.6x since2010. Shares are now discounting close to or less than spot price, weestimate. The risk-reward ratio now looks attractive with upside toprice targets on most base metals producers with large copper expo- sure. Financial risk has declined in line with the broader industry. Weprefer Overweight-rated Anglo American, Freeport (upgraded fromEqual-weight). Glencore,Lundin Mining and Sandfire. Recent transactions indicative of copper asset scarcity.Corporate and strategic investor interest has been persistentthrough the cycle. Transactions that have taken place over the last12 months focused on minority stakes in large greenfield projects inSouth America and Serbia. Even in the cycle trough of 2015 transac- tions took place at an implied copper price 40% above spot at thetime. Risks to our thesis. A mild demand recession similar to 2015 couldtrigger downside to USD1.95/lb, the 90th percentile on the 2019 costcurve. A continued equity de-rating is possible but we consider itunlikely as copper producers have consistently delivered reasonablereturn on capital over time in contrast to the gold sector. Faster adop- tion of electric vehicles drives upside risk to our 1.6% demand CAGR2019-2025 and further regulatory uncertainty could trigger down- side to supply. Exhibit 1: We see a very attractive investment case for copper equities that offersa combination of upside to industry profitability... 0.8 1.3 1.8 2.3 2.8 3.3 3.8 4.3 20 08 20 09 20 10 20 11 20 12 20 13 20 14 20 15 20 16 20 17 20 18 20 19 USD /lb Cu PriceAverage implied Cu Price in shares* Source: Company data, Morgan Stanley Research estimates, *= Average implied copper price in shares is simple average for ANTO, FCX, Southern Copper, KAZ, KGHM, JXC, and China Molybdenum, Impliedcopper price for KAZ is starting from 2015, KGHM from 2011, JXC from 2010 and China Molybdenum from 2014 Exhibit 2: …a much more attractive valuation compared to history and 14%upside to the copper price from a supply driven deficit in 2019 16,000 17,000 18,000 19,000 20,000 21,000 22,000 23,000 20182019202020212022202320242025 Demand for Mined Copper (kt) OperatingCommittedNon-committed (100% basis)Source: Company data, Morgan Stanley Research estimatesM 4 MContents 5An opportune moment: stars aligned 5So what is so special about 2019-20 10Order of preference 14Industry health: sustainable profits and lowfinancial risk 14No excess profit on spot copper price 14Resumption of inflation provides pricesupport 16Industry profit pool not excessive,especiallyagainst the backdrop of rising capitalintensity 18Supply risk muted until 2022 despite risingcapex 18Financial risks have declined but not so muchthat we expect a spending boom in the nextthree years 19Equities: discounting realisticexpectations 22Global Copper comps 23A Supply-Driven Deficit 23Supply growth stalls 25Bringing it back to balance 26Demand: we take a conservative view 28Ex-China demand 29Electric Vehicles – a longer term demanddriver 30Market balance and price outlook 31Appendix 1 - Historical Demand and Price inPerspective 32Appendix 2 - Demand Constituents 33Appendix 3 - mineSPY 34Appendix 4 - Copper supply-demand balance 。。。。。。