Antofagasta Plc (LON:ANTO) is a London, United Kingdom-based copper mining company. It is mainly engaged in the activities related to exploration, evaluation and mining of copper in Chile. In 1888, the group was incorporated in London. The company’s business is differentiated into two divisions, being mining and transportation. The mining segment is further divided into different segments based on the exploration activities and mines of the company. The company is part of FTSE 100, FTSE 350, and FTSE All-Share Index.

Key Statistics



Top Shareholders

 

The current Chairman is Jean-Paul Luksic, who was appointed in 2004. Iván Arriagada holds the responsibilities of the Chief Executive Officer and joined the group in 2015. Alfredo Atucha holds the responsibilities of Chief Financial officer.

The company will announce the Q4 FY2019 production report on 22^nd January 2020 and full year 2019 results on 17^th March 2020.

 
(Source: Company Website)

The strategy for growing the mining business is differentiated into three pillars: the existing core business, organic and sustainable growth of the core business, and growth beyond the core business.The first pillar is to enhance and optimise the current core business. The second pillar is to attain sustainable, organic growth by developing the regions around the company’s current asset base in Chile. The third pillar is to seek progress beyond the company’s current operations, in Chile or globally, with the acquisition of high-potential early-stage developments and high-quality operating assets.

Segments

The company’s operations are divided into two reportable segments being Mining and Transport for management purpose. The company’s mining segment is further split based on exploration activities and mines. The mining segment is further divided into Los Pelambres, Exploration and evaluation, Zaldívar, Antucoya, Centinela and Corporate and other items. The transport division offers truck and rail solutions to the mining business. This segment is also recognized by Ferrocarril de Antofagasta a Bolivia (FCAB).

In the Q3 FY2019 and 9M FY2019, the overall mining division had a decent performance.In the third quarter of 2019, the company’s transport division volumes increased by 4.7% to 1.8 million tonnes against the previous quarter. The total transport volumes for the first nine months of 2019 surged by 9.6% to 4.9 million tonnes, due to a new transport contract and higher tonnages from the current clients.

Production Guidance Update (as on 4^th November 2019)

The company came out with an update on the production operations at its Los Pelambres and Antucoya mines in Chile. The group reported that all its mines are now back in operation after a phase of unrest that had gripped the Chilean region. At Los Pelambres mine, the phase of unrest and the subsequent loss of operation will have an effect on the production of around 10 thousand tons of copper for the financial year 2019. At Antucoya mine, the negotiations with the labour unions facility have been successful. They had gone into a strike from October 16, 2019, and there is now a resumption of work there. The loss of copper production at this facility is expected to be around 4 thousand tons. The company revised its total production target for the year 2019 to 750,000-770,000 tons from the 750,000- 790,000 tons guided previously.

Q3 FY2019 Production Report (as on 23^rd October 2019)


(Source: Production Report, Company Website)

In the third quarter of the financial year 2019, the company’s copper production was at 197,000 tonnes and declined by 0.8 per cent versus Q2 2019 data. The company’s production was in line as expected and improved mainly because of the higher grades and high throughput. The company’s gold production for the third quarter of the financial year 2019 was stated at 77,600 ounces and reduced by 10.7 per cent against the second quarter of 2019 data, driven by the decline in the Centinela’s grades. The production of Molybdenum for the Q3 FY2019 stood at 2,900 tonnes and declined by 100 tonnes versus Q2 2019 data. For the Q3 2019, the net cash cost was stated at $1.12/lb, down by 1.8 per cent from the Q2 FY2019 data. For the nine months FY2019, net cash cost stood at $1.17/lb and was 17.6 per cent lower than the nine months FY2018 data.

The copper production for nine months FY2019 stood at 584,200 tonnesand surged by 15.6 per cent versus nine months FY2018 data. On the YTD (year to date) basis, the gold production stood at 226,600 ounces for the period. The production of gold surged by 88.7 per cent as compared with the same period of the last year. Due to lower grades, the production stood at 9,300 tonnes for nine months FY2019 and declined by 1,000 tonnes versus nine months FY2018 data. For the nine months FY2019, cash costs (before by-product credits) stood at $1.64/lb and was 11.4 per cent lower than the nine months FY2018 data. The unit cost improved due to costs savings, increased production and weaker Chilean Peso.


(Source: Commodity Prices and Exchange rates, Production Report, Company Website)

On 30^th September 2019, the spot commodity prices for copper, gold and molybdenum stood at $2.60/lb, $1,473/oz and $11.8/lbas compared with the previous period (June 30, 2019) and previous year (31 December 2018). For the current quarter, the provisional pricing adjustments for copper, gold and molybdenum were negative $56.8 million, positive $2.4 million and negative $3.0 million, respectively. For the first nine months of the year 2019, the provisional pricing adjustments for gold, molybdenum, and copper were positive $4.4 million and negative $1.2 million, and negative $51.3 million, respectively. The copper production in 2020 is expected to be around 725-755,000 tonnes.

Financial Highlights (for the six months ended 30 June 2019)


(Source: Interim Presentation, Company Website)

For the six months ended 30 June 2019, due to an increase in gold revenues and a 25.1% increase in copper sales volumes, revenue was 19.1% higher than in the same period of last year to $2,525.6 million. The rise in revenue was recorded despite a fall in the realised copper prices and lower realised molybdenum prices.

In H1 FY2019, the subsidiaries operating profit rose by 52.1% to $791.7 millionagainst the $520.4 million in H1 FY2018. As revenue rose due to a higher production of cooper, EBITDA from the mining division increased by $402.3 million or 46.9% to $1,260.8 million, leading to 44.4% increase in group’s EBITDA to $1,305.9 million, which corresponded to an EBITDA margin of 51.7%. Profit before tax for the first half of 2019 increased by 63.9% to $763.0 million as against $465.6 million in H1 FY18.

The profit for the period stood at $490.4 million in H1 FY2019and surged from $315.7 million in the first half of the financial year 2018. The earnings per share from continuing and discontinued operations stood at 30.7 cents in H1 FY19 as compared to the 19.8 cents in H1 FY2018.

During the H1 FY2019, the net debt declined by $78.9 million to $517.4 million.This represents a net debt to EBITDA ratio of 0.20x. The interim dividend per share stood at 10.7 cents, an increase of 57.4% as compared with the same period of last year. This was equivalent to a payout ratio of 35 per cent of Net Earnings.

Key Performance Indicators

Net Debt

In the financial year 2018, the net debt increased by $140 million to $596 million as compared with the financial year 2017 of $456 million.

Copper Production


The company’s main product is copper, and its production is an important operational measure. In the FY2018 period, the company achieved a good production volume of 725,300 tonnes, up by 3 per cent against 2017 production data.

Net Cash Costs


The net cash cost tells about the operating efficiency and profitability. In FY2018, the net cash costs stood at $1.29/lb, an increase of 3.2% against the previous year data, as average grades decreased and cost pressure from rising input prices.

Mineral Resources


This measure provides details about strong organic growth in the pipeline. Zaldívar mine’s mineral resources in the financial year 2018 resulted in an increase in the company’s mineral resources base to 18.8 billion tonnes.

Water Consumption


Water is a valuable resource, and the company is focused on using it efficiently. In the FY2018, the company’s water consumption increased by 0.7 per cent due to an increase in the production and material processed.

Financial Ratios

 

The reported gross margin in H1 FY2019 surged by 5.6 per cent to 43.50 per centagainst 37.9 per cent reported last year for the same period. The reported EBITDA margin of 48.7 per cent for the H1 FY2019 stood higher than the industry median of 33.70 per cent. The reported operating margin in H1 FY2019 increased by 6.8 per cent to 32 per cent from 25.2 per cent reported last year for the same period. Net margin reported was 19.4 per cent for the first half of the financial year 2019, reflecting an increase of 4.6 per cent when compared with last year data for the same period. Return on equity for the first half of the Financial year 2019 stood at 4.1 per cent, which was lower than the industry median of 4.7 per cent. On the liquidity front, Antofagasta Plc’s current ratio was higher than the industry median of 1.67, reflecting sufficient current assets to pay its short-term obligations. On leverage front, the debt-equity ratio stood at 0.37x, which was lower as compared to the industry median of 0.54x, reflecting that the company is less leveraged as compared to its peers.

Share Price Performance


Daily Chart as at November-27-19, before the market close (Source: Thomson Reuters)

On November 27, 2019, at the time of writing (before the market close, at 11:55 AM GMT), Antofagasta PLC shares were trading at GBX 912, up by 0.62 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 1,026/GBX 727.60. At the time of writing, the share was trading 11.11 per cent lower than the 52w High and 25.34 per cent higher than the 52w low. Stock’s average traded volume for 5 days was 1,429,045.40; 30 days – 1,547,350.40 and 90 days – 1,942,465.69. The average traded volume for 5 days was down by 7.65 per cent as compared to 30 days average traded volume. The company’s stock beta was 1.30, reflecting higher volatility as equated to the benchmark index. The outstanding market capitalisation was around £8.96 billion, with a dividend yield of 4.15%.

The shares of the company have delivered a positive return of 11.63 per cent in the last quarter. The company’s stock has given investors 4.11 per cent of a positive return in the last month.

Valuation Methodology
Method 1: Price to Cash Flow Approach (NTM) 
 

To compare Antofagasta Plc with its industry, Price to Cash Flow multiple has been used. The Industry Median of Price to Cash Flow (NTM) was 7x (approx.).

Method 2: EV/EBITDA Approach (NTM)



To compare Antofagasta Plc with its peers, EV/EBITDA multiple has been used. The peers are Anglo American PLC (NTM EV/EBITDA was 4.88), BHP Group PLC (NTM EV/EBITDA was 5.98), Central Asia Metals Plc (NTM EV/EBITDA was 4.93), Glencore PLC (NTM EV/EBITDA was 6.05) and Kaz Minerals Plc (NTM EV/EBITDA was 4.80). The Average of EV/EBITDA (NTM) of the company’s peers was 5.32x (approx.).

Growth Prospects and Risk Assessment

The company has many growth projects under the pipeline in Chile. The company’s owned Centinela and Los Pelambres mines have shown good production capacity with high grade concentrates. The company pointed out to investors the potential risks inherent in the mining sector, including the volatile nature of commodity prices and currencies. The company has good control over its input costs which resulted in an increase in the profitability of the company. Demand for copper and new capital investment plans may provide new growth opportunities to the company. The company has strong production volumes for the nine months FY2019 and is expected to increase it further in the FY2020 period.

The company noted the uncertainty caused by the continuing trade dispute between the USA and China, which has affected copper prices as it is widely used in electrical components and renewable energy. Furthermore, the sector is exposed to political, financial and operational risks, each of which has the potential to impact company/industry performance significantly.

Conclusion

In the third quarter of 2019, the company reported a robust production update. Consistent operating performance with higher grades at several operations, contributed to the YTD 584,200 tonnes of copper volumes, up by 16 per centfrom the same period of last year.

For 2019, the net cash cost guidance for the year has been reduced by $1.25/lb. The company revised its total production target for the year 2019 to 750,000-770,000 tonnes.The company is well-positioned for growth, generating strong cash flows and improving returns. Cost efficiency, strong reserves & resources and business performance of Los Pelambres strengthened its operations, even as declining production is a cause for concern.

Over the course of 3 years (FY15 - FY18), the company’s revenue surged from USD 3,225.7 million in FY15 to USD 4,733.1 million in FY19. Compounded annual growth rate (CAGR) stood at 13.63 per cent.

Based on the decent fundamental prospects and support from the valuation as done using the above two methods, we have given a “BUY” recommendation at the closing price of GBX 906.40 (as on 26th November 2019) with high single-digit upside potential based on 7x NTM Price/Cash Flow (approx.) on FY19E cash flow per share (approx.) and 5.32x NTM EV/EBITDA (approx.) on FY19E EBITDA (approx.).
 
*All forecasted figures and peers have been taken from Thomson Reuters (TR). Currency exchange rate taken for 1 USD = 0.776449 GBP.
*The “Buy” recommendation is also valid for the current price as covered in the report (as on 27th November 2019).

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