Dull production outlook takes some of the shine off copper producer Antofagasta

Usually, a firm copper price would be a good sign for both the global economy and the share price of FTSE 100 member Antofagasta, but the Chilean producer’s shares are looking a little dull after its full-year results for 2022.

This may be down to ongoing fears that a recession is coming, although Antofagasta has its own specific issues with which to deal, notably cost inflation, a drought in Chile and a delayed desalination plant. Even so, a strong copper price could cure all of these ills and then some in the coming year, especially if China’s economy starts to motor and consume raw materials in large volumes once more.

Copper’s malleability, conductivity and ductility mean it has many industrial uses across infrastructure, construction and cars to name but three – it is not for nothing that it has the nickname ‘Doctor Copper.’

The industrial metal’s price sank from $10,000 a ton to below $8,000 in mid-2022 as markets fretted over the risk of a global slowdown, but China’s reopening and more soothing words from the International Monetary Fund and the Davos crowd mean the metal is rallying and dragging Antofagasta’s share price along with it.

Source: Refinitiv data

However, investors will want to see that Antofagasta is well placed to capitalise upon stronger metal prices, should the copper market stay firm.

Copper production came in at the lower end of expectations in 2022, at 646,200 tonnes, thanks to dry weather in Chile and the late opening of a water desalination plant which left Antofagasta further short of the precious water it needs at its mines. Management seems confident that output will recover to some degree in 2023, to between 670,000 and 710,000 tones as the desalination plant opens in the second quarter, but that still leaves output below 2021 levels.

Investors will hope that improved water availability helps bring some relief on input cost inflation, too. In 2022 net cash costs rose by a third to $1.61 a pound, thanks to water shortages but also higher prices for fuel and acid, even though Antofagasta ran cost-efficiency programmes and gleaned some benefit from the weaker Chilean peso. Further cost efficiencies will help in 2023, when production cost growth is expected to ameliorate and take net cash costs up marginally to $1.65 a pound, the equivalent of around $3,650 a metric tonne.

Source: Company accounts, management guidance for 2023E.

That is still a long way below the prevailing copper price of more than $9,000 a tonne and modest input cost increases and higher output mean analysts think that earnings will rise again in 2023, after 2022’s dip, when output fell and input costs rose sharply.

Using Antofagasta’s preferred profit metric of earnings before interest, taxes, depreciation and amortisation (EBITDA), analysts think there will be a modest rebound to $3.2 billion in 2023, after 2022’s 40% slump to $2.9 billion.

Source: Company accounts, Marketscreener, consensus analysts’ forecasts

The payment of a $0.5970-per-share dividend, in effect all of earnings per share on an underlying basis, suggests management is looking forward to 2023 with confidence, even if that represents a big drop in the distribution compared to 2021’s $1.4250. Analysts seem less confident and are pencilling in a drop in the dividend to $0.41 and then $0.36 in 2023 and 2024 respectively.

Source: Company accounts, Marketscreener, consensus analysts’ forecasts

At current exchange rates, that takes the dividend payment from north of £1 billion in 2021 to barely £300 million by 2024, when the yield on the stock is barely 2%. That won’t excite income seekers and momentum players may be looking for more strength in the copper price before they take the plunge, especially as the shares have had a strong run since the autumn lows on hopes that the global economy will suffer a soft landing at worst in 2023.

These articles are for information purposes only and are not a personal recommendation or advice.