Take a contrarian view on Antofagasta

Antofagasta, a FTSE 100 miner controlled by Chile's Luksic family, is one of the world's largest copper producers with activities mainly centred on Chile, where it operates four copper mines: Los Pelambres, El Tesoro, Michilla and Esperanza. The group also generates substantial revenues from by-product sales and has ancillary rail and water businesses.

Considering the pullback in copper prices, Antofagasta's market valuation has held up reasonably well, declining 27 per cent from the year high set early in 2014. Part of the reason why Antofagasta's shares are well supported is its tendency to return excess capital to shareholders; hardly surprising given that 65 per cent of the shares are held by the Luksic family. The group has recently committed to doling out a dividend equivalent to at least 35 per cent of net earnings - although given the gloomy backdrop more large special dividends may be off the agenda for the moment.

Earnings and free-cash-flow are under pressure as global production of refined copper is expected to exceed demand by about 350,000 tonnes in 2015, according to October consensus figures. Concern over Chinese industrial demand is weighing on the copper price. Copper is routinely used in China as collateral in loan agreements, but last year investigators unearthed evidence that some companies had been utilising the same copper ingots as collateral for multiple loans. The scandal hit the copper price hard and the full knock-on effects may not be fully played out. So there's no point in pretending that the near-term outlook is rosy - it isn't.

However, it's worth mentioning that, because of the extent of mine cutbacks in recent months, there are some voices, most notably commodity trader Glencore (GLEN), that have raised doubts about the extent of the anticipated global surplus. And it may not be too long before copper - and by extension, Antofagasta - is set for a comeback. A number of analysts predict that between 2016 and 2018 the copper market will click back into deficit as the industry will be unable to meet expected demand growth.

Refined global copper output stands at 18.3m tonnes. Even taking into account dampened expectations for Chinese growth, the industry will need to add around 6.6 per cent in additional production every year to meet anticipated demand growth over the next decade. The industry's ability to meet this challenge is also being hampered by a seemingly relentless fall in ore grades.