ii view: copper colossus Antofagasta hopes for rain

Strong results were recently tarnished by an increasingly uncertain outlook. We assess prospects. 

First-half results to 30 June 2021

• Revenue up 68% to $3.59 billion
• Average realised copper price up 80% to $4.42/lb
• Adjusted profit (EBITDA) up 133% to $2.36 billion
• Interim dividend up 281% to 23.6 cents per share

Guidance:

• Expects full-year copper production between 710,000 & 740,000 tonnes, down from 730,000 & 760,000 tonnes

Chief executive Iván Arriagada said:

“We have seen strong copper demand and prices at multi-year highs over the first half of this year which has contributed to the robust financial performance of the Group.

"The half year was not without challenges as we continued to manage our operations and projects under Covid-19 conditions, although the resilience and agility of the Group has resulted in costs below guidance. 

"The weather in central Chile during H1 saw unprecedentedly dry conditions, with almost no rainfall.  As a result, assuming there is only minimal precipitation during the rest of H2, we are adjusting our full year copper production guidance to 710-740,000 tonnes. However, we are maintaining net cost guidance.

"Our key growth projects are on track and we remain focused on operating discipline and cost control, while producing copper responsibly and sustainably for all our stakeholders."

ii round-up:

Tracing its history back to the Bolivia Railway company in 1888, Antofagasta (LSE:ANTO) today is a major copper miner in Chile. 

It owns major stakes in and operates four copper mines - Los Pelambres and Centinela are its two largest and are being expanded. Antucoya and Zaldivar are  smaller.

Significant volumes of gold and molybdenum are produced as by-products. 

The miner also operates a transport division providing rail and road cargo services in Northern Chile, mainly to mining customers and including its own operations. 

For a round-up of these latest results, please click here. 

ii view:

The mining industry is tough and often difficult for managements to navigate. Operational issues outside of their control, such as the weather, can hinder performance. For Antofagasta, a lack of rainfall has forced management to cut its copper production estimate by 20,000 tonnes for this year. A further 50,000 tonnes could be at risk during 2022 if the dry weather persists. Clean water is a key ingredient in the production of copper. Both cost and capital expenditure estimates were left unchanged, although potential to accelerate project spend was flagged. 

For investors, an 80% increase in the average realised copper price underlines the importance of the commodity to the world economy. Vaccination programmes are continuing, with demand from Asia, and including its biggest country customer Japan, ongoing. A hike in the dividend puts the shares on an historic yield of over 2%, with an expected jump in the final payment leaving it sat on an estimated yield of around 4.5%. 

But uncertainties have clearly increased. Production is dependent on rainfall and new mining royalties are under government debate in order to help the nation pay for the Covid crisis. Currency risks given commodities are priced in US dollars, operations in Chile and shares priced in pounds sterling, are a constant. Dividend payments at rivals such as BHP Group (LSE:BHP) and Rio Tinto (LSE:RIO) are also currently more generous. For now, and with the shares sat close to the consensus analyst estimate fair value of £15.14,  the shares are arguably up with events for now. 

Positives: 

• Cost and competitiveness programme
• A return to dividend growth

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