Industrial metals: was 2020 a high point or is there more to come?

While much of the world struggled last year, increased metals demand from China and shaky production in some locales saw miners book record profits and pay-out hefty dividends. Antofagasta (ANTO) and Ferrexpo (FXPO) have continued the trend started by the majors, who passed billions in free cash flow on to investors. 

However, the distribution incentive for both miners differs in one key respect: both have shareholders who control more than half of the their company's issued share capital. In Antofagasta’s case it is the famous Luksic family, with 65 per cent, while Kostyantin Zhevago effectively wields control at Ferrexpo. Whether this is an ideal scenario for minority holders is open to question, but with an overall positive outlook on industrial metals, the pay-outs look set to continue this year. 

Copper has so far had a stronger 2021 than iron ore, which largely drove the 2020 dividend bonanza. The red metal is over $9,000 (£6,520) a tonne (t) - over $4 per pound (lb) - so any miner exposed to the red metal is looking at hefty cash flow increases in 2021. Iron ore has not a bad start to 2021, by any means, however, staying well over $150/t. But there are concerns within China over air pollution caused by steelmakers, and this combined with a potential slowdown in construction could see iron ore drop off from its charmed 18-month run. 

Making hay

Antofagasta is certainly setting itself up for a big year while copper is so strong.

Production guidance for 2021 is 730,000-760,000t of copper, compared with 733,900t last year. Its cash costs will be up slightly on 2020, at a forecast $1.65/lb, but the copper price is now a third higher than the average realised price for last year of $2.98/lb, or around $6,600/t. 

The miner also produces gold, which is accounted for as a by-product credit. While gold is trading at a nine-month low of just over $1,700 an ounce (oz), Antofagasta has set 2021 guidance for gold as significantly higher than last year, at 240,000-260,000oz, a minimum increase of almost 20 per cent on last year. 

Through 2020, Antofagasta recorded cash profits of $2.7bn, a 12 per cent increase on 2019, and dropped net debt significantly. It has declared a final dividend of 48.5¢, taking its total 2020 pay-out to 54.7¢, triple the 2019 full-year rate. 

Steely returns 

Ferrexpo will hand shareholders a special dividend of 39.6¢ after strong iron ore prices sent profits surging in 2020. The Ukraine mining company – 50.3 per cent owned by Zhevago – saw its underlying cash profits climb 46 per cent to $859m last year. Lower costs and higher production also helped profits, and the miner hit net cash in 2020. 

The board is also considering a final dividend for 2020, on top of the special pay-out. This will be worked out in time for the May AGM. 

It could be argued that while Antofagasta is not unduly influenced by the Luksic family, Ferrexpo is very much in the shadow of Zhevago. He has been a target for Ukrainian authorities for years, and they have repeatedly attempted to freeze his Swiss-held stake in Ferrexpo. There is also a case moving through the courts challenging a 2002 transaction of shares in a Ukrainian subsidiary. 

The 2020 results contained a long list of related-party transactions with entities controlled by Zhevago, who stepped aside as chief executive in 2019, including a loan to a football club he owns – FC Vorskla. The committee said “additional arrangements” had been made for the $17m loan to be repaid by mid 2022. 

Acting chief executive Jim North told Investors’ Chronicle that governance was a real focus for the miner, with a new independent director recently appointed and the hiring of another planned. The company lost two independent directors in 2019 soon after Deloitte quit as auditor. 

North said Zhevago was “very influential” over the board as majority owner, and that his involvement is a strength for the company – he certainly has a vested interest in the company's success. 

“The board operates independently, and, [Zhevago] trusts me to manage the organisation, as do all the other directors,” he said. 

The governance issues came to the fore for shareholders two years ago, as, following the resignation of Deloitte as auditor, the company’s share price plunged. 

In the past year, however, its market capitalisation has fully recovered, and now the company is trading at a 10-year high. 

The company sells iron ore pellets rather than the ore shipped between the Pilbara and China. These are higher-grade and need less energy to turn into steel, and so are sold at a premium to the usual 62 per cent iron ore. 

Premiums fell last year, however, as steelmakers outside of China were more affected by the pandemic. Between January and August, the pellet premium dropped from $25/t to $5/t, Ferrexpo said. This had more impact than it would have in 2019 because the same forces saw the share of production going to China increase from 30 per cent to 56 per cent year-on-year. Ferrexpo said premiums had started climbing again in the first months of this year. 

The company said production would likely increase this year from the 29.8mt in 2020. 

For Antofagasta we see a company with some challenges ahead – spending is expected to increase, and water usage remains an environmental concern – but overall a good investment. Buy. At Ferrexpo, despite the high cash profits, dividend and positive outlook, we see the risks as outweighing the benefit. Sell. 

Last IC view for Antofagasta: Buy, 1,085p, 20 Aug 2020

Last IC view for Ferrexpo: Sell, 121p, 18 March 2020