Business Overview
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


(Source: Thomson Reuters)

Company’s Business Model


(Source: Company Website)

Antofagasta has a robust business model starting from the exploration activity. Evaluation of the site then takes place followed by the construction activity. Extraction and Processing activity takes place next. Marketing of the products is the critical step for the company, and the entire process gets over by the closure of the mine.

Company Strategy

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.


(Source: Company Website)

Investment case
 

(a) Quality of existing assets and growth pipeline with strong capital returns.

(b) Focus on copper and up-stream mining activities.

(c) Vast experience of the management team.
 

Growth in copper production


(Source: Interim Report, Company Website)

The company has increased its copper production from 630 kt in 2015 to 770 kt in 2019.

Company with safety perspective


(Source: Interim Report, Company Website)

The company has focused on the safety performance and its lost time injury frequency rate has declined from 2 in 2015 to 1.01 in 2019 with 0 fatalities in 2019.

Projects Outlook

The Group is expecting to add additional 80,000-90,000 tons of copper production from three new projects.

Los Pelambres Expansion - Phase 1

60,000 tons of copper is expected from this project. The capex for this project is expected to be around $1.3 billion.

Zaldivar Chloride Leach

10,000-15,000 tons of copper is expected from this project. The capex for this project is expected around $0.19 billion.

Esperanza Sur Pit

10,000-15,000 tons of copper is expected from this project. The capex for this project is expected around $0.17 billion.

Growth Factors


(Source: Interim Report, Company Website)
 

(a) High quality assets

(b) Operating efficiency and cost control

(c) Capital discipline

(d) Robust platform
 

Industry Overview

Mining companies have a window of opportunity to demonstrate that they are essential to resourcing the future and that they have what it takes to respond to the rapidly changing world around them. They should use their strong balance sheets and cash generating ability to make the difficult yet essential transformations for a low carbon, high tech and consumer-centric future. The top five companies contribute 50 per cent of total top 40 market capitalisation. Overall, production is expected to increase by approximately 2%. The outlook remains extremely sensitive to commodity prices. As a guide, if resultant prices are at the more conservative end of the expected range, then revenues would drop to 3% below 2018- year levels and EBITDA drops even further to 2017 levels. Conversely, if the top end of the range was achieved, then revenue increases by more than 3% and EBITDA by 10% (compared with 2018).

Recent News
On 30^th January 2020, the company announced that Alfredo Atucha will be retiring from the Company on 31 March 2020 and will be replaced as Group Chief Financial Officer by Mauricio Ortiz, the current Vice President of Finance of the Mining Division.

On 29^th January 2020, the company announced that Antofagasta Plc announces that Vivianne Blanlot, an independent Non-Executive Director, will join the Nomination and Governance Committee and Ramon Jara, a Non-Executive Director, will join the Sustainability and Stakeholder Management Committee. Both appointments are with effect from 1 February 2020.

Fourth Quarter of 2019 Production Update

Increase in Copper Production in FY2019

For the full year 2019, the copper production increased by 6.2% to 770,000 tonnes as compared with the corresponding period of the last year, driven by higher production at Centinela, Los Pelambres, and Zaldívar. The company’s copper production for the fourth quarter of 2019 decreased by 5.8% to 185,500 tonnes against the previous quarter, driven by the disruption of fuel deliveries to Los Pelambres, the strike at Antucoya, and planned lower grades and maintenance at Centinela Concentrates.

Increase in Gold Production in FY2019

In Q4 FY19, the gold production stood at 55.6 thousand ounces, a decrease of 28.4%from the third quarter of 2019, driven by the lower grades at Centinela. For the full year 2019, the gold production increased by 34.4% to 282,300 ounces against the previous year 2018 and above from the guidance.

Decrease in Molybdenum Production in FY2019

Molybdenum production was 11.6 thousand tonnes for the full year 2019 and 2,300 tonnes in Q4 FY19, a decrease of 14.7% and 20.7% from the previous year 2018 and the previous quarter (Q3).

Cash Costs
Led by the tight cost control, the weaker Chilean Peso, and higher production, the cash costs before by-product credits decreased by 7c/lb to $1.65/lb in the full year 2019 against the last year 2018. In Q4 FY19, the cash costs before by-product credits increased by 6.3% to $1.70/lb against $1.60/Ib in Q3 FY19, driven by the lower production, mainly at Centinela. The net cash costs for the fourth quarter of 2019 increased by 22.3% to $1.37/lb as compared with the previous quarter of $1.12/Ib. This reflects substantially lower by-products credits and higher cash costs before by-products credits. At the end of 2019, the progress on the Los Pelambres development project touched to 31%.

Higher Copper sales lead the revenue momentum for H1 Financial Year 2019


(Source: Interim Reports, Company Website)

Revenue surged in H1 FY2019

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.

Robust Operating Profits in H1 FY2019

In H1 FY2019, the subsidiaries operating profit rose by 52.1% to $791.7 million against 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.

Profit grew in H1 FY2019

The profit for the period stood at $490.4 million in H1 FY2019 and 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.

Net Debt declined

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 Performing Indicators

Financial Metrics


(Source: Company Website)

Net Debt

The company reported net debt of $596 million in 2018. The Group has consistently decreased its net debt from $1,024 million in 2015 to $596 million in 2018.

EBITDA

The company reported EBITDA of $2,228 million in 2018, improving from the low of $910 million in 2015.

Earnings Per Share

The company reported EPS of 51.50 cents in 2018, improving from the low of 0.5 cents in 2015.

Operational Metrics
 
 

(Source: Company Website)

Copper Production

The copper production of the Group is increased to record 725.3k tons in 2018.

Net cash costs

Net cash costs in 2018 increased by 3.2 per cent to $1.29/lb.

Mineral Resources

Group minerals resources increased to 18.8 billion tonnes in 2018 as compared to 18.7 billion in 2017.

Consistent Dividends


(Source: Company Website)

The company has consistently shared its wealth in the form of dividends to its investors. The Group declared a dividend of 37 cents per share in the final ordinary 2018.

Financial Ratios

 

The reported EBITDA margin in H1 FY19 was 48.70 per cent against the industry median of 32.40%. The reported operating margin was 32 per cent for the H1 FY19. Net margin reported was 19.40 per cent for the first half of 2019, higher from the industry median of 6.9%. Return on equity for the current first half stood at 4.1 per cent. On the liquidity front, Antofagasta Plc current ratio stood at 2.31x. On leverage front, the debt-equity ratio of the Antofagasta Plc’s was 0.37 i.e. the company is less leveraged than the industry with debt-equity ratio of 0.57.

Share Price Performance


Daily Chart as on 4^thMarch 2020, before the market closed (Source: Thomson Reuters)

On March 4, 2020, at the time of writing (before the market close, at 11:25 AM GMT), Antofagasta Plc shares were trading at GBX 801.40, up by 2.83 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 1,026/GBX 738.53. Stock’s average traded volume for 5 days was 3,210,058.00; 30 days – 1,926,218.43 and 90 days – 1,677,225.01. The group’s stock is reflecting higher volatility as against the benchmark index based on the company’s beta of 1.28. The outstanding market capitalisation was around £7.64 billion, with a dividend yield of 4.75 per cent.

From the technical standpoint, 14 days-Relative Strength Index of the stock is hovering near the oversold zone, which is strengthening the upside move.

Valuation Methodology

Method 1: EV to EBITDA Approach (NTM)


Currency exchange rate taken for 1 USD = 0.7825 GBP.

To compare Antofagasta Plc with its peers, EV/EBITDA multiple has been used. The peers are Glencore Plc (NTM EV/EBITDA was 5.47), BHP Group Plc (NTM EV/EBITDA was 5.40) and Aperam SA (NTM EV/EBITDA was 5.68). The Average of EV/EBITDA (NTM) of the company’s peers was 5.52x (approx.)
 
Method 2: Price to Earnings Approach (NTM)



To compare Antofagasta Plc with its peers, P/E multiple has been used. The peers are Fresnillo Plc (NTM P/E was 25.64), Freeport-McMoRan Inc (NTM P/E was 20) and First Quantum Minerals Ltd (NTM P/E was 23.53). The Average of P/E (NTM) of the company’s peers was 23.53x (approx.)

Valuation Metrics


(Source: LSE)

As on 31^st January 2020, the Price to Earnings ratio of the Antofagasta Plc’s was around 21.90which was lower as compared with the industry, which shows that the company is underpriced than the respective industry. The company’s EV/EBITDA multiple is 5.4x which was lower as compared with the industry which shows that the company is underpriced than the industry.


(Source: LSE)

This analysis is a useful technique to decompose the different drivers of ROE. It can be further examined through three financial metrics which are: net profit margin, asset turnover and financial leverage. This analysis helps to deduce whether the company’s profitability, use of debt or assets that’s driving ROE. In 2020, the ROE is increasing as compared to its peers.

Antofagasta V/S FTSE-100 Price – 5 Years


(Source: Thomson Reuters)

In the last five years, Antofagasta Plc share price has delivered 8.06 per cent return as compared to negative 1.33 per cent return of FTSE-100 index, which shows that the stock has outperformed the index during the last 5 years.

Antofagasta V/S Industry V/S Sector – 2 years


(Source: Thomson Reuters)

In the last two years, Antofagasta Plc share price declined by 7.60 per cent which is lower than the industry decline of 33.37 per cent and sector decline of 11.46 per cent.

Dividend Yield


(Source: Thomson Reuters)

Antofagasta Plc has a dividend yield of 4.75 per cent which is slightly lower than the industry dividend yield of 6.72 per cent and in line with sector dividend yield of 4.23 per cent.

Antofagasta Total return - 5 years


(Source: Thomson Reuters)

In the last five years, Antofagasta Plc has delivered a total return of 15.71 per cent while the FTSE All share index has delivered a total return of 22.54 per cent.

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 cent from 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 group 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 FY18. 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 current  price of GBX 777 (as on 4th March 2020 at 8:01 AM GMT) with lower double-digit upside potential based on 5.52x NTM EV/EBITDA (approx.) on FY20E EBITDA (approx.) and 23.53x NTM Price/Earnings (approx.) on FY20E earnings per share (approx.). 
 
 
*All forecasted figures and Peers information has been taken from Thomson Reuters.

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