Antofagasta reels from copper price and production drop

It’s a sea of red for copper miner Antofagasta (ANTO) in the first half. Not the metal itself, but the company's year-on-year performances. This was not a surprise, given the pullback in the copper price and lower production, but the declines are still striking: Ebitda fell by almost half to $1.2bn (£1bn), while the margin tumbled a whole 16.6 percentage points, to 49 per cent, as the net cash cost surged 60 per cent compared with a year ago, to $1.82 per pound (lb). 

The Chilean miner has kept to a 35 per cent payout ratio for the dividend, but this means it is down to 9.2ȼ a share from 23.6ȼ last year. 

The weaker copper price was a result of lockdowns in China sapping demand, as well as the broader property crisis there, on top of fears of a global slowdown. This has seen a 62 per cent retracement of the 2020-2022 rally during which it went over $10,000 a tonne, or $4.50 per lb. At the same time, droughts in Chile, a concentrate pipeline failure and lower grades at the Centinela mine knocked Antofagasta's first-half copper sales by 26 per cent, to 240,400 tonnes. 

The company has stuck with its lowered production guidance for the full year of 640,000-660,000 tonnes, despite the tough conditions. Antofagasta beat Peel Hunt forecasts for operating profit, at $680mn against $576mn, and was ahead of its 8ȼ dividend estimate. 

Chief executive Iván Arriagada said the completion of a desalination plant would remove some of the production constraints from the company’s mines. “We expect the remainder of the year to look very different from the first half,” he said. 

Antofagasta is close to finishing the Los Pelambres expansion project (exactly 81.7 per cent complete as of 30 June) that will up copper production. Looking ahead, the company is getting to the decision point on a $3.7bn project to expand production at the Centinela mine. In the background to this decision is Chile's incoming new constitution and new tax regime that could see the company tax rate rise to over 50 per cent. 

Peel Hunt forecasts a rapid rebound in cash profits next year, from $2.6bn in 2022 to $4bn in 2023. This is still below 2021, but that will be hard to top given the heady price environment and what now seem to be extremely forgiving costs. We are long-term bullish on copper and Antofagasta reducing its water needs will pay dividends given Chile’s seemingly permanent drought conditions. Buy. 

Last IC View: Buy, 1,443p, 22 Feb 2022