ii view: Antofagasta Q2 numbers fail to excite

Shares in this copper miner are down by just over a fifth year-to-date. Buy, sell, or hold?

Second-quarter production update

• Copper production down 6.5% from the previous quarter
• Gold production down 7.8% from the previous quarter

Guidance:

• Copper production for the full year is expected to be between 640,000 and 660,000 tonnes, down from a previous 660,000 to 690,000 tonnes

ii round-up:

Chilean copper miner Antofagasta (LSE:ANTO) today detailed a fall in quarterly production as it battled drought conditions, the temporary closure of a concentrate pipeline due to a leak and lower ore grades.

Second quarter copper production to the end of June fell 6.5% from the previous quarter to 129,800 tonnes. Operational challenges also underpinned a cut in management’s full-year copper production forecast to between 640,000 and 660,000 tonnes, down from 660,000 to 690,000 tonnes previously. 

Antofagasta shares were little changed in UK trading having already fallen by just over a fifth year-to-date. Shares for more diversified miner Rio Tinto (LSE:RIO) are down around 4% during 2022, while the FTSE All Share index is down by a fifth. 

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Antofagasta owns major stakes in and operates four copper mines, with Los Pelambres and Centinela its two largest. Significant volumes of gold and molybdenum are also recovered as by-products of copper production. 

Rises in diesel and other costs resulted in management upping expected full-year net cash cost guidance to $1.65/lb from a previous $1.55/lb and ahead of City forecasts of $1.57/lb. 

Gold production fell by nearly 8% from the previous quarter to 35,400 ounces, largely due to the concentrate pipeline leak which has now been fixed. 

The price of copper, used widely from household wiring to vehicle electrics, has dropped by just over a quarter year-to-date, with the metal recently suffering its worst week in a year as Chinese economic growth disappointed.

First-half results are scheduled for 11 August.   

ii view:

Tracing its history back to the Bolivia Railway company in 1888, Antofagasta is now a major Chilean copper miner. It also operates a transport division providing rail and road cargo services in Northern Chile, mainly to mining customers and including its own operations.

In 2021, management detailed a number of environmental goals including using only renewable energy sources to power its operations by the end of 2022, and with 90% of all water used in production coming from either seawater or recirculated water by 2025. Clean water is a key ingredient in the production of copper. 

For investors, an uncertain economic outlook and fears about a potential recession continue to overshadow the price of copper. Operational challenges have hindered production during this latest quarter while potential changes in government taxes could impede progress. 

On the upside, an expansion of its existing operations is currently being undertaken. The completion of a desalination water plant is also expected later this year, aiding operational issues, while a move to using only renewable energy across its operations was completed in April. On balance, and while some caution looks sensible given copper’s sensitivity to economic growth, an estimated future dividend yield of over 4.5% is likely to keep income investors satisfied.    

Positives: 

• Working on production expansion plans
• Attractive dividend (not guaranteed)

Negatives:

• Less diverse commodity portfolio than many rivals
• Factors outside of management’s control can impact performance

The average rating of stock market analysts:

Hold