need-copper-exposure-buy-antofagasta-and-lock-in-a-3.4-dividend

Need Copper Exposure? Buy Antofagasta And Lock In A 3.4% Dividend

Introduction

Some are believers in the copper price, others expect the world economy to slow down even further which will result in lower copper prices. There's only one way to be careful, and that's by selecting companies that are producing the base metal at a low cost as that reduces the leverage on the metal price. Yes, even a low-cost producer will see its cash flows being reduced, but it should be able to remain cash flow positive. And that's where Antofagasta (OTC:ANFGF) (OTCPK:ANFGY) comes into the picture as it's an established copper producer at an all-in cost of less than 2 dollars per pound.

Source: Yahoo Finance

Despite its status as senior copper producer, Antofagasta doesn't have a listing on a Tier-1 exchange in the US, and I would strongly recommend using the facilities of the London Stock Exchange as the liquidity will definitely be better there. In London, Antofagasta is trading with ANTO as its ticker symbol, and the average daily volume is 2.5 million shares. The current market capitalization is 9.5B GBP, which is roughly $12.4B using the current GBP/USD exchange rate of 1.305.

The company also is the third largest position in the Global X Copper Miners ETF (COPX) with a 5.46% weight.

A strong cash flow performance allows for investments and dividends

In 2018, Antofagasta produced a total of 725,300 tonnes of copper, thanks to an exceptionally strong final quarter wherein it produced 220,000 tonnes of copper, a 17% increase compared to the third quarter as especially the Centinela mine boosted its copper concentrate production by 68% as its concentrator is currently running at a throughput of 6% above the design capacity. The excellent performance at Centinela also pushed the net cash cost per produced pound of copper down to just 90 cents, thanks to the higher by-product revenue from selling almost 61,000 ounces of gold in the fourth quarter.

Source: full-year press release

For 2018, Antofagasta's revenue remained stable at $4.7B, but due to higher operating expenses (mainly related to a higher depreciation rate and higher operating expenses on the mine level), the EBITDA did decrease by in excess of 10% to $2.23B (this obviously excludes the increase of the depreciation charges), while the operating profit fell by almost 30% to $1.37B. The net income attributable to Antofagasta's equity owners dropped from $751M to $544M for a total of 55.1 cents per share (or approximately 42 pence). As you undoubtedly notice, due to the higher operating expenses, Antofagasta's 2018 wasn't that great.

But there's no need to be alarmed. The income statement definitely looks weaker, but the company's cash flow results remain very impressive. Antofagasta reported an operating cash flow of $1.31B, but this includes spending $74M more on taxes than what was due over FY 2018 as well as a $242M investment in the working capital position, but then excluded a $120 payment to non-controlling interests. Additionally, Antofagasta also received interest payments and dividend payments to the tune of $43M which should also be taken into account.

Source: full-year press release

After adjusting the reported operating cash flow for these elements, the adjusted operating cash flow was $1.55B, and after spending $873M on capital expenditures, the adjusted free cash flow result was approximately $680M. That being said, only $120M of the $337M attributable to non-controlling interests was effectively paid out, so if you would take that into consideration as well, the 'real' free cash flow result attributable to Antofagasta's own shareholders would have been around $460M. Definitely not great, but keep in mind the $873M in capex also includes investments in growth capex.

Source: company presentation

When looking at the full-year overview, you'll notice the sustaining capex was just $310M, with a large part of the remaining capex having been spent on mine and development, with the majority being spent on Centinela.

The guidance for 2019 looks good, and Antofagasta is an excellent way to gain exposure to the copper sector

The investment in further growth is paying off as Antofagasta is now guiding for a full-year copper production of 750,000-790,000 tonnes, and the midpoint of this guidance would represent a 6% production increase. Considering the net cash cost after taking the by-product revenue into consideration is expected to remain stable, I think it's fair to assume Antofagasta's full-year operating cash flow (including taxes but excluding any payments to non-controlling interests) will total $1.75-1.8B.

Source: company presentation

And, that's necessary as Antofagasta is once again planning to spend more money on additional growth. Antofagasta has guided for a full-year capex of approximately $1.2B, which would be roughly 35% more than the previous financial year. But once again, only a small part of the $1.2B capex (roughly one-third) will be classified as sustaining capex. The development and mine development pillars will be the main culprits for the higher capex as Antofagasta is kicking off the Los Pelambres expansion plan.

Source: company presentation

The total expansion will cost $1.3B and will take approximately 2-3 years. Once the Los Pelambres project will be completed, the production will increase by approximately 130 million pounds of copper, and this will pave the way for a second expansion phase to increase the copper output by an additional 75-80 million pounds while extending the mine life by in excess of a decade.

Additionally, Antofagasta has a very clear dividend policy as it will pay 'at least 35% of the underlying net earnings' as dividend. For FY 2018, the full-year dividend will come in at almost $0.44, which is almost 34 pence. At the current share price, Antofagasta's dividend yield is approximately 3.4%, which is absolutely excellent, considering the company's investment plans in additional output capacity.

Investment thesis

And, that's what makes Antofagasta so appealing. The company's existing operations are generating enough cash flow to allow the company to auto-finance its expansion and optimization plans. Several copper producers have high operating expenses (on a per produced pound basis), but thanks to the substantial amount of by-product credits (Antofagasta will produce a quarter of a million ounces of gold this year), the net cash cost of Antofagasta's operations is estimated at just $1.30 per pound.

I do have a small long position in Antofagasta and believe the company's long-life mines provide excellent exposure to the copper market.

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Disclosure: I am/we are long ANFGF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.