Antofagasta: buy the drop

That pullback – a 14 per cent drop since a high in early June on the back of a 7 per cent fall in the copper price – should not surprise anyone who has followed escalating rhetoric around trade. Because economic growth translates to higher infrastructure spending and resources demand, uncertainty in the former tends to weigh on the latter. Markets are nervous that the rise in protectionist trade policies will hit demand for copper, which closely tracks real economic growth. When the price of the red metal drops, Antofagasta's shares are prone to suffer greater declines.

The threats from rising tariffs should not be underplayed, the effect of which will always be more pronounced among mining stocks. But investors should feel confident in making other assumptions, the first being that the current spat started, and will likely end, in the fast-moving feast of US politics. Whatever its limits, Donald Trump’s rift with China can only go so far. Accordingly, we should expect concessions or a de-escalation that preserves states’ rational impulse to pursue economic growth.   

In demand terms, we can count on several long-term trends: the urbanisation of billions of souls, the rise of the copper-intensive renewable energy and electric vehicle industries, and the need to upgrade and increase infrastructure spending. To the latter point, analysts at Bernstein reckon copper consumption will grow at 2.5 per cent a year until 2030 to simply meet the average recommendations of the world’s leading infrastructure spending studies. On BMO’s numbers, these trends will only widen a deficit expected to hit 400,000 tonnes in 2018.

Into this market, Antofagasta is growing. Mine development expenditure averaged $345m in the past two financial years, which was more than five times the average of 2014 and 2015. It should step up again to $375m in 2018. Group annual production guidance is for 705-740 thousand tonnes of copper (ktpa), while the promise of higher grades has prompted consensus analyst expectations of 806kt in 2019, or sales of 880kt once refined product is included. Assuming the recent completion of wage renegotiations caps a potential source of inflationary pressure, the market believes Antofagasta’s earnings to be up a quarter in 2019. While the 2019 price/earnings ratio of 15 is a premium to Rio Tinto, BHP and Glencore, the Chilean company’s negligible borrowing levels help justify this.

A premium is doubly warranted because Antofagasta has already entered its next growth phase. In February, Los Pelambres received environmental approval for a plan to increase copper output by 55ktpa from 2021 – a project that could hoover up $1.3bn but which may well be rationalised by options to add at least 35ktpa thereafter. A green light is expected by the end of the year, alongside the verdict on an option to expand concentrator capacity at Centinela. A more expensive option to build a second concentrator at the mine, currently subject to a feasibility study, could result in a massive 180ktpa uplift in output.

In setting out this strategy, Antofagasta’s timing isn’t at the rock bottom of the cycle. Conversely, the industry as a whole is not indulging in pro-cyclical investment that would risk cannibalising value – that is at least if the herd resists following Anglo American’s suit and splashes out on a raft of copper projects on the scale of Quellaveco in Peru. Antofagasta is arguably ahead of the curve, and adding supply by increments.