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Antofagasta
Antofagasta’s 2004 turnover was almost doubled from that of 2003 to US$ 2.0bn with EBITDA up 153% to US$ 1.2bn: Higher copper prices (up 61%), higher copper production (up 5.6%) and the effects of operational gearing drove the increase in profits. Antofagasta continued to increase production year-on-year, with production in 2004 up 5.6% to 498,400 tonnes. Saddled with excess cash, Antofagasta proposed to return 40 cents per share as a special dividend with ordinary dividends up 11% for the year. For 2004, Antofagasta’s free cash flow per share of 515 cents is 1.8× the EPS of 283 cents.
Antofagasta produces copper and its activities are mainly concentrated in Chile where it owns and operates three copper mines, Los Pelambres (60% ownership), El Tesoro (61% ownership ) and Michilla (74.2% ownership). Antofagasta also operates a rail network servicing and distributes water in northern Chile.
Average cash costs fell by 33.2% to 24.3 cents a pound. The improvement is largely a result of higher molybdenum prices rather than real cost savings - average molybdenum prices were up c205% compared with the 2003.
Copper sales in concentrate at the Los Pelambres mine (82% of operating profit) was up 7.3% Antofagasta increased the amount of daily average ore treated (up 11.1%) to compensate for the lower ore grade (amount of copper).
Cathode copper production at the El Tesoro mine (13% of operating profit) was up 5.8%. Here again, a lower ore grade was compensated by a 15% increase in the average daily treated ore quantity. Cash costs increased by 23.6% to 52.4 cents per pound due to higher acid and energy costs. Ore crushing capacity was increased by 7.8%, which should offset lower ore grades.
Production at the Michilla mine (2.3% of group sales) was down 5.1% due to a reduction in grades and what the company claims were ‘operational problems’- which the Antofagasta claims to have been resolved. Fourth quarter production was greater than in 2003, which may justify the company’s claims. Higher energy and acid costs increased the cash costs by 22.6% to 85.5 cents a pound, which will increase further in 2005.
The current lower grades will increase costs as more acid and more energy is used to produce copper. Antofagasta’s copper production is expected to be 5.7% lower in 2005. The increase in costs, and lower production may mean a lower profit in 2005.
Prices are expected to fall (though not drastically) in the medium term as producers increase production to make use of the current higher prices. The growth of the Chinese and other Asian economies will sustain long term demand for copper.
Antofagasta’s share trades at a prospective PE× of 9.6 (1,254p), at the lower end of the range for the sector. The 2.0% yield is in line with the sector. The rating reflects the expected fall in prices of copper and the Chilean governments proposal of a new 4%-5% tax on the operating income. All three of Antofagasta’s mines are in Chile.
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