Key Investment Highlights
 

1. Antofagasta Plc (LON: ANTO) has a wide geographic reach and offers a variety of products including Copper, molybdenum, gold and copper cathodes.

2. The group is focused on its 5 pillars strategy to achieve its short to medium-term objectives.

3. The company achieves productivity by streamlining its processes and controlling costs using CCP (Competitiveness and Cost Programme).

4. ANTO has increased investments in its digital roadmap and focussed on using technology, robotics and automation to achieve growth at a faster pace.

5. The Group had a record year of production in 2019 at a lower production cost than in 2018, which reflects the improved grades across all its operations and holds potential to yield substantial cash flows in future. 

6. The Group has approved the expansion of Los Pelambres to curb the declining impact of ore grades at Centinela.

7. Delivered strong revenue growth with decent operational performance for the current period.

8. Robust balance sheet with decent cash flow generation capabilities to drive shareholder returns.

9. The group has shown the ability to make extended investment decisions and construct & operate large projects, which can generate higher cash flows at a lower cost.

10. The group is confident towards its business model and management team to tackle the uncertain times created due to coronavirus pandemic and is working closely in sync with its employees, contractors, suppliers, partners, authorities and civil society.
 

Antofagasta PLC (LON: ANTO) is driving growth through sustainable long-term operations and strong pipeline under construction, with a continuing record of zero fatalities.

Antofagasta PLC is a FTSE 100 listed, international copper mining company. It is primarily 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. However, mining contributed 96% of their revenue and EBITDA in the financial year 2019. The mining segment is further divided into different segments based on the exploration activities and mines of the company, namely Los Pelambres, Antucoya, Centinela, Zaldívar, Exploration and evaluation, Corporate and other items. In addition to the mining division, the transport division provides road and rail cargo services in Northern Chile. The Company follows five-pillar strategy for growth, i.e. People, Competitiveness, Safety and Sustainability, Growth and Innovation.

The Company will hold its annual general meeting on 20^th May 2020, and it will announce its half-yearly results for 2020 on 20th August 2020.



(Source: Annual Report, Company Website)

Key Statistics



Segments at a Glance
 

1. Geographically, the Group generates revenue from four regions - Europe, Latin America, North America and Asia.

2. Besides its main production of copper, the Group also generates small amount of revenue from Gold, Molybdenum and Silver.

3. Further, the Group organises its business into two business divisions – Mining and Transport.
 

Let us look at some of the key statistics in 2019:

Los Pelambres

1. Copper Production: 363,400 tonnes.

2. Net Cash Costs: $0.91/lb.
 

Antucoya

1. Copper Production: 71,900 tonnes.

2. Cash Costs: $2.17/lb.
 

Centinela

1. Copper Production: 276,600 tonnes.

2. Net Cash Costs: $1.26/lb.
 

Zaldívar

1. Copper Production: 58,100 tonnes.

2. Cash Costs: $1.75/lb.
 

Transport

1. Transported 6,533 kilo tonnes of cargo.

2. Transport volumes grew 7.7% in 2019 as compared to 2018.
 

Progress of Key Performance Indicators in 2019
 

1. The Group reported a record safety performance with a LTIFR (Lost Time Injury Frequency Rate) of 1.0 and no fatal accident. While the Chilean mining industry for LTIFR was 1.54 in 2019 and the number of fatalities were 14.

2. Driven by increased production at Los Pelambres, Centinela and Zaldívar; the total copper production stood at 770,000 tonnes (representing 6.2% increase over 2018 production).

3. The mineral resources stood at 19.1 billion tonnes as against 18.8 billion tonnes, which would support the Group’s organic growth pipeline.

4. The consumption of seawater and continental water was reduced by 7% and 12%, respectively (as against 2018).

5. The emission of CO2 intensity reduced by 7% (compared to 2018), as the company adopted several energy efficiency initiatives.

6. Los Pelambres Expansion project came under production, while Esperanza Sur pit and Zaldívar Chloride Leach projects got approved.
 

Investment Case – Creating Sustainable Value for Shareholders
 

High-Quality Assets:

1. A robust production with progressive growth.

2. Sizeable resource base.

3. Operates four mines in two “world class” districts in Chile.
 

Cost Control and Operating Efficiency:

1. Continuous improvement in productivity.

2. Competitiveness in cost and Innovation initiate for long-term benefits.
 

Capital Discipline:

1. Operating at a low net debt state.

2. Consistent dividend policy.
 

Robust Platform:

1. Optimising the mines on a continuous basis.

2. Disciplined policy for disposal and acquisition.
 

Top Shareholders

 

Q1 Production Update FY2020 – Higher Productivity with Lower Cash Costs
 

1. On 22^nd April 2020, Antofagasta released an update on the production in the first quarter of the financial year 2020. The group witnessed an increase in the production of copper by 2.9 per cent to 194,000 tonnes versus Q1 FY2019 and 4.6 per cent higher than Q4 FY2019 data.

2. Driven by higher grades at Centinela mine, the gold production surged by 4.7 per cent to 65,100 ounces in Q1 FY2020 versus Q1 FY2019 data. The production of Molybdenum declined by 1,100 tonnes to 2,400 tonnes in Q1 FY2020 versus  Q1 FY2019 data, due to low-quality grades at Los Pelambres mine. The Molybdenum production stood higher by 100 tonnes versus Q4 FY2019 data.

3. The group’s cash costs (before by-product credits) declined by 11.2 per cent to $1.51/lb in the Q1 FY2020 versus $1.70/lb in Q1 FY2019, driven by tighter cost control, higher production and weaker Chilean peso.

4. The net cash costs stood at $1.10/lb in Q1 FY2020 versus $1.24/lb in Q1 FY2019 and $1.37/lb in Q4 FY2019.

5. Based on the present situation, the company expect its copper production for FY2020 to be on the lower side of the guided range between 725,000 tonnes to 755,000 tonnes, with net cash costs to be around $1.20/lb.

6. The capital expenditure to be below $1.3 billion for FY2020.
 

Financial Highlights for the year ended 31st December 2019: Robust Balance Sheet with Sustainable Business Model


(Source: Annual Report, Company Website)
 

1. For the financial year ending 31st December 2019, driven by an increase in the sale of gold and copper, the group’s revenue increased by 4.9 per cent to USD 4,964.5 million versus USD 4,733.1 million in FY2018.

2. Driven by lower unit costs and higher revenue, the EBITDA increased by 9.5 per cent to USD 2,438.9 million in FY2019 from USD 2,228.3 million in FY2018, while the EBITDA margin stood at 49.1 per cent for the period.

3. The higher EBITDA was offset by higher costs related to tax, and depreciation and amortisation, the underlying earnings per share (continuing operations) declined by 1.2 per cent to 50.9 cents in FY2019 versus 51.5 cents in FY2018.

4. The dividend per share declined to 34.1 cents in the financial year 2019 versus 43.8 cents in FY2018.

 
Financial Ratios – Strong Profitability Margins versus the Industry Median 
 
 

The reported Gross margin, EBITDA margin, Operating Margin, Pretax margin and Net margin stood at 40.3 per cent, 63.8 per cent, 28.2 per cent, 27.2 per cent and 17.00 per cent, respectively, for the FY2019 and stood higher than the industry median. The Return on Equity of 6.8 per cent in the financial year 2019 stood higher than the industry median and last year ROE for the same period. On the liquidity front, AntofagastaPlc’scurrent ratio was higher than the industry median of 1.68, reflecting sufficient current assets to pay its short-term obligations. On leverage front, the debt-equity ratio of the AntofagastaPlc’swas 0.37x, which was lower as compared to the industry median of 0.40x.

Share Price Performance


Daily Chart as on 29^th April 2020, before the market close (Source: Refinitiv, Thomson Reuters)

On April 29, 2020, at the time of writing (before the market close, at 11:12 AM GMT+1), AntofagastaPlc shares were trading at GBX 791.60, up by 2.22 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 993.80/GBX 575.00.

Bullish Technical Indicator

From the technical standpoint, its shares were trading well above its short-term support level of 20-day simple moving average prices, which reflects an uptrend in the stock and carrying the potential to move up further.

Valuation Methodology

Method 1: Enterprise Value to Sales (NTM)



To compare Antofagasta Plc with its peers, EV/Sales multiple has been used. The peers are Polymetal International Plc (NTM EV/Sales was 4.48), Central Asia Metals Plc (NTM EV/Sales was 2.42), BHP Group Plc (NTM EV/Sales was 2.75), Kaz Minerals Plc (NTM EV/Sales was 2.54) and Fresnillo Plc (NTM EV/Sales was 3.09). The Average of EV/Sales (NTM) of the company’s peers was 3.06x (approx.)

Method 2: Price/Cash Flow (NTM) Approach

 

To compare Antofagasta Plc with its peers, Price/Cash Flow multiple has been used. The peers are Polymetal International Plc (NTM Price/Cash Flow was 9.64), Fresnillo Plc (NTM Price/Cash Flow was 9.47), Atalaya Mining Plc (NTM Price/Cash Flow was 7.62), GMK Noril'skiy Nikel' PAO (NTM Price/Cash Flow was 6.15) and South32 Ltd (NTM Price/Cash Flow was 5.60). The Average of Price/Cash Flow (NTM) of the company’s peers was 7.70x (approx.).

Valuation Metrics


(Source: London Stock Exchange)

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 are driving ROE.

Dividend Yield


(Source: Refinitiv, Thomson Reuters)

Antofagasta Plc has a dividend yield of 3.58 per cent, which is lower than the industry dividend yield and higher than the sector dividend yield of 3.33 per cent. This needs to be considered in view of the recent correction in the stock price.

Antofagasta Plc Vs FTSE 100 Index (5 Years)


(Source: Refinitiv, Thomson Reuters)

In the last five years, Antofagasta Plc share price has delivered 0.36 per cent returns as compared to negative 13.40 per cent returns of FTSE-100 index, which shows that the stock has outperformed the index during the last five years.

Total Return 5 Years


(Source: Refinitiv, Thomson Reuters)

Antofagasta Plc has generated a total return of 10.08 per cent in the last five years versus the total return of FTSE All share of 4.42 per cent for five years period.
 
Industry Outlook

The copper industry is cyclical in nature, and it was affected by the uncertainty regarding global trade dispute in 2019, which led the average copper price to $2.72/lb (8 per cent lower than 2018 average price). As per Technavio, the global copper market size is expected to grow by 3,896 thousand metric tonnes from 2018 to 2022. However, the uncertainties are continuing to rule the market as earlier it was due to US-China trade war, and now Covid-19 disruption is creating the volatility and raising supply concerns. In the long run, the factors which will drive the market are Increasing urbanisation, Demand for renewable energy and Electromobility of vehicles. 

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 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 in the Q1 of the financial year 2020. 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.


(Source: Company Website)

Business Outlook Scenario

The company has shown an increase in revenue in the financial year 2019. The group’s operating performance has improved as a result of the Cost and Competitiveness Programme. 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. The company has a robust balance sheet and reduced its net debt by 5.5 per cent to USD 563.4 million for the period. The company has many growth projects under the pipeline in Chile. The company has good control over its input costs, which resulted in an increase in the profitability of the company. To tackle the outbreak of Covid-19, the company has taken various actions and is encouraging social distancing at its operations and Los Pelambres Expansion project. The group remained confident about its management team and business model to face the uncertainty created due to Covid-19 outbreak.

Antofagasta was able to offset the impact of lower price with enhanced production at a lower cost than 2018. It reflects the improved grades across all operations, which holds the potential to generate solid cash flows. In 2019, Zaldívar’s Chloride Leach project was approved (which is USD 190 million investment), it will further increase the copper production. However, ore grades at Centinela declined in 2019, which would affect the production in 2020 as well; In order to reverse this decline, the Group has sanctioned the expansion of Los Pelambres, which will reach to its full production by 2022.

 Over the course of 3 years (FY16 - FY19), the company’s revenue surged from USD 3,21.70 million in FY16 to USD 4,964.5 million in FY19. Compounded annual growth rate (CAGR) stood at 11.08 per cent.

Based on the decent 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 774.40 (as on 28^th April 2020), with lower-double digit upside potential, based on 3.06x EV/Sales (approx.) on FY20E sales (approx.) and 7.70x NTM Price/Cash flow (approx.) on FY20E cash flow per share (approx.).
 
*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.
*The “Buy” recommendation is also valid for the current price as covered in the report (as on 29^th April 2020).

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