ii view: Antofagasta dividend shines

Copper and gold production are tipped to grow in 2021. Buy, sell or hold?

Full-year results to 31 December 2020

Chief executive Iván Arriagada said:

"I am proud of how everyone at Antofagasta has worked together and adjusted to overcome the year's challenges.

"Our resilient operations performed well with high levels of throughput and our Cost and Competitiveness Programme delivered benefits of $197 million, nearly double the targeted amount. Our balance sheet strengthened even further.

"We are delighted that 100% of our mining division's electricity consumption in 2022 will be from renewable sources.”

ii round-up:

Chilean miner Antofagasta (LSE:ANTO) today reported a 12.3% increase in adjusted full-year profit to $2.74 billion (£1.97 billion), buoyed by higher copper and gold prices, matching City forecasts.

Management guidance, or forecasts for 2021 stayed the same, although a final dividend payment of 48.5 US cents comfortably exceeded analyst estimates and equated to 100% of underlying earnings per share.

The final dividend made for a 2020 total of 54.7 cents per share (39.4p per share), up from a pre-pandemic 2018 total of 44 cents per share and in sharp contrast to the Covid cautious 18 cents paid during 2019. 

Antofagasta shares drifted marginally lower in UK trading, having gained by over 170% since pandemic induced lows back in March 2020. Shares for fellow miners Anglo American (LSE:AAL) and Glencore (LSE:GLEN) are up by similar amounts.

An 8.4% and 27% gain in the realised prices of copper and gold respectively over the year helped group revenue to rise by 3% to $5.13 billion (£3.69 billion). Copper, the group’s core commodity, went from $2.74 a pound (/lb) at the start of 2020 to $2.09/lb in March at the height of the pandemic. It had risen to $3.50/lb by the end of the year as key customer China reined in the virus and vaccination programmes globally were launched. 

Copper production for Antofagasta fell by almost 5% to 733,900 tonnes, hindered by expected lower grades and some operational disruption from the virus. Gold and Molybdenum production also fell. 

Copper production in 2021 is expected to be up to 760,000 tonnes because a pipeline of growth projects was hindered during 2020 by the pandemic. Following Covid suspensions, three projects recommenced in the third quarter and, allowing for virus protocols, are now expected to complete in 2022.

Management’s cost and competitiveness programme generated benefits of $197 million during the year, comfortably above a target of $100 million. Group debt stood at $82 million at the year end, equivalent to a net debt/EBITDA ratio of 0.03 times. 

Separate labour negotiations are currently underway with the plant and mine unions at its core Los Pelambres operation. They are expected to conclude by the end of March. 

ii view:

The mining industry is tough and often difficult for managements to navigate. Operational issues such as reduced staffing under Covid-19 in 2020, exploration success, staff disputes, the weather and the price direction of the commodity being extracted, can all impact financial performance. 

For Antofagasta specifically, a highly focused portfolio of mined commodities adds to the risks when compared with more diverse rivals. Currency movements between commodities priced in US dollars, costs priced in Chilean Pesos and the share price listed on the UK stock market in sterling add further to investor risks and forecasting. 

For investors, a historic dividend yield of around 2.2% and expected increases in copper and gold production during 2021 are not to be overlooked. A strong balance sheet is attractive too. But ongoing talks with the workforce offers a degree of uncertainty, as does the continuing pandemic. An estimated price/earnings ratio comfortably above the three-year average also suggests the shares are not obviously cheap. For now, and following a 60% plus gain in the share price since late October, just prior to announced vaccination development success, the shares look to be up with events. 

Positives: 

• Cost and competitiveness programme
• A return to dividend growth

Negatives:

• Ongoing talks with some staff
• Factors outside of management’s control can impact performance

The average rating of stock market analysts:

Weak hold