The share price in question is that of Chilean copper miner Antofagasta (ANTO), to which the intuitive response is: come on, that’s no mystery at all, the price is disappearing because it’s linked to the annual ritual of punters – you can’t really call them ‘investors’ – getting in a dither about the slowing pace of China’s growth and, therefore, selling Chinese equities. From that, there is a sort of syllogistic connection with Antofagasta’s share price since slowing growth in China means faltering demand for copper, which hits Antofagasta.
Yet the link between Antofagasta’s share price and China’s stock markets is not as strong as is widely assumed. Based on monthly returns over the past five years, the two move in the same direction less than a third of the time. And that’s probably as it should be, because Antofagasta’s fortunes are not bound that tightly to China’s. At least, exports to China accounted for 24 per cent of its revenues in 2014.
Meanwhile, Japan has consistently been Antofagasta’s biggest market. It absorbed 37 per cent of its output in 2014 and has taken up that sort of proportion for the past five years. The fact that Japan is hardly a growth market did not seem to matter to Antofagasta’s share price when it was riding clear of £12 three years ago, so why should it matter so much now that China’s demand for copper may be faltering?
The plausible response to that question would be because the state of China’s economy must have a big influence on the copper price and, more than anything, Antofagasta’s share price is linked to changes in that commodity’s price – in the past five years almost three-quarters of the time its price and copper’s have moved in the same direction (
). That’s pretty much the same as the correlation in price movements between Antofagasta and the FTSE Mining sector index and it’s slightly higher than the correlation between Antofagasta and its closest lookalike, Southern Copper Corporation (NYSE:SCCO), which is 75 per cent-owned by Mexican mining conglomerate Grupo Mexico.However, in the opening weeks of 2016 Antofagasta’s share price has fallen noticeably further than any of these comparators. As of Monday, it had dropped 25 per cent in 2016 compared with 19 per cent for the FTSE Mining index, 18 per cent for the Shanghai Composite index, 13 per cent for Southern Copper’s shares and just 9 per cent for the price of copper.
True, Antofagasta’s earnings are a geared play on the copper price so its share price should be leveraged, too. But the same applies to Southern Copper and the fact that Antofagasta’s shares have performed so much worse than all the comparators implies that something company-specific is happening.
If so, then it’s not obviously revealed in the volume of shares traded. This year, the numbers have been pretty normal with the exception of 14 January when the trading volume was the highest for a year – although the share price nudged up 4p during that day.
Nor has there been any word from the company. The last that was heard from its bosses was in October when they released a miserable trading update for 2015’s third quarter. They cut their forecast for Antofagasta’s copper production in 2015 to 635,000 tonnes. That was fully 10 per cent less than their expectation at the start of the year – 710,000 tonnes – and was even close to 5 per cent less than they had expected in August (665,000 tonnes). All of which is another way of saying that Antofagasta was making enough trouble for itself without the copper market adding to its problems – protests at its biggest mine, Los Pelambres, meant lost production, as did a sliding pit wall and a delayed ramp-up in production at its Centinela complex of mines. Then – because it never rains but it pours – torrential storms in the Atacama Desert also disrupted production at Centinela.
More will be known at the end of the month when management releases its fourth-quarter update for 2015. That may confirm that some pretty astute selling has been happening, or it may provide the basis for the share price to bounce like a copper spring.
As long as the news isn’t seriously bad, you have to wonder how much lower Antofagasta’s shares can fall. After all, this low-cost producer still makes profits with the copper price at its current $1.94 per pound. That’s almost a 10-year low and the last time the copper price was lower than its current level – late 2008 – proved a great time to buy the shares. It’s probably too much – and too naive – to imagine that history is about to repeat itself so neatly. Even so, I’ll be taking a close look at what Antofagasta’s bosses have to say at the end of the month. After all, we all like a good mystery, but we also demand that a mystery be solved.
