Antofagasta profits soar but production falters

Iron ore miners have rightly been the focus of this earnings season, handing out record dividends on the back of strengthening profitability. But copper is also on a run, and the biggest London pure play, Antofagasta (ANTO), has also had a scorcher of a first half.

Its half-year cash profit more than doubled on last year, climbing to $2.4bn (£1.75bn), while the underlying margin also jumped from 47 per cent to 66 per cent. The half-year dividend of 23.6¢ is well ahead of both last year and 2019’s midpoint distributions. 

It’s not all positive, however. The miner has cut guidance because Chile’s drought conditions have worsened, with warmer weather and a lack of rain meaning its key Los Pelambres operation might not have enough water to run at full capacity. Antofagasta has dropped its full-year production forecast from 730,000-760,000 tonnes (t) to 710,000-740,000t. Lower grades also contributed to an 8 per cent fall in copper production at Los Pelambres, which, combined with the US Federal Reserve minutes-induced sell-off and copper hitting a four-month low of around $9,000/t, saw Antofagasta’s share price drop 5 per cent on results day. 

The big increase in cash profits also came up short of what some analysts had predicted, missing BMO Capital Markets’ forecast by 4 per cent. Copper is a key industrial commodity, and its record highs in the first half were a product of Chinese stimulus. Liberum analyst Tom Price said if inflation comes above central bank expectations, copper and iron ore would “probably report [the] largest corrections, too”. He forecasts the price to fall back to an average of $7,100t next year. 

Antofagasta is also still facing pandemic restrictions, chief executive Iván Arriagada said, who also highlighted first-half costs coming below guidance of $1.25 a pound (lb) despite the pandemic, a stronger Chilean peso and higher fuel prices. 

Antofagasta is in the midst of expanding Los Pelambres, and is still guiding a second-half 2022 completion for this $1.7bn project, which will add 60,000t a year to production. The expansion includes a desalination plant, which will “mitigate any prolonged water shortage”. Part II of the plan is at the permitting stage and will add capacity to the desalination plant. 

Consensus forecasts compiled by FactSet see earnings per share doubling for the full year compared with 2019, at 108¢.

A looming fall in the copper price is not ideal for Antofagasta but it is in net cash and looks to soon have a fix to its water issues. Buy. 

Last IC View: Buy, 1,709p, 17 Mar 2021