ii view: Antofagasta cuts the dividend

A cut not a suspension of the dividend, but possible Covid production hits look to be growing. 

ii round-up:

Chilean copper miner Antofagasta (LSE:ANTO) today cut its proposed 2019 final dividend payment because of the spread of Covid-19 both in Chile and globally. 

Chile has recorded a significant increase in the number of new coronavirus cases since 13 May and, on 15 May, the Chilean Government imposed a total quarantine over the Greater Santiago area.

Antofagasta shares were little changed in afternoon UK trading having fallen by nearly 11% year-to-date. BHP Group (LSE:BHP) shares are down by a similar amount. Anglo American (LSE:AAL), given sizeable operations in corona hit South Africa, has seen its shares fall by 26% during 2020.

The copper miner has decided that it would be prudent to conserve cash by revising its 2019 dividend recommendation to 7.1 US cents per share, down from 23.4 cents per share previously (18.6841 pence per ordinary share). 

The new dividend proposal represents a total 2019 distribution of $175.5 million, or 17.8 cents per share, down from $336 million and equal to a 35% pay-out of net earnings.

Capital expenditure was previously reduced to a forecast of less than $1.3 billion, down from $1.5 billion.

Initiatives to buy more equipment locally and defer expenditure on certain projects were also previously outlined under its efforts to cut costs.

Anto, which operates four mines in Chile, enjoyed record copper production of 770,000 tonnes in 2019, up 6.2% year-over-year. Adjusted 2019 profit (EBITDA) rose by 9.5% to $2.44 billion. 

ii view:

The mining industry is tough and often difficult for managements to navigate. Exploration success, operational issues, staff difficulties, the weather, not to mention trying to second guess the direction of the commodity being extracted, can all impact financial performance. 

For Antofagasta specifically, a highly focused portfolio of mined commodities adds to the risks when compared with more diverse rivals. Currency movements between commodities priced in US dollars, costs priced in Chilean Pesos and the share price listed on the UK stock market in sterling add further to investor risks and forecasting. 

For investors, a modest dividend yield and the production of safe haven asset gold - 282,300 ounces produced in 2019 – offer some attraction. But this needs to be set against copper’s high industrial usage, the current coronavirus hit to demand, and the ongoing spread of the virus in Chile and growing risks to production. 

Positives: 

• Cost and competitiveness programme
• A cut not halting of the dividend payment

Negatives:

• The spread of Covid-19 in Chile may hit production
• Factors outside of management’s control can impact performance

The average rating of stock market analysts:

Weak hold