This FTSE 100 miner has seen its shares double in 2009.
Much of today's Britain is beset with gloom and with good reason. Alone amongst the OECD countries Britain remains stuck in the worst recession since the war, unemployment continues to rise and there are fears that we are entering a "lost decade", similar to that experienced by Japan where the economy failed to grow during the 1990s.
If you have similar concerns this doesn't mean that you should completely avoid investing in shares because many "British" companies, such as BP (LSE: BP) and Diageo (LSE: DGE), are multinationals and thus obtain most of their profits from overseas sales. This means that their businesses are relatively unaffected by a lacklustre British economy. In the event that UK corporate taxes become too high and/or HM Revenue & Customs' behaviour becomes increasingly arbitrary a multinational can always decamp to another country with lower tax rates, such as Ireland, as WPP Group (LSE: WPP) did last year.
One company whose shares are listed in London but which completely avoids exposure to the British economy is the Chilean copper miner, Antofagasta (LSE: ANTO), whose shares have significantly outperformed the FTSE 100 index (of which it is a member) in 2009.
An Anglo-Chilean Company
Antofagasta can trace its history back to the Antofagasta (Chili) and Bolivia Railway Company which floated on the London Stock Exchange in 1888 to raise funds for the construction of a railway from La Paz, the capital of Bolivia, to the Chilean port of Antofagasta. Antofagasta's businesses, with the exception of some small exploration projects in Ecuador, Pakistan and Peru, are all based in Chile.
Antofagasta used to have major interests in banking (Banco O'Higgins), manufacturing and telecommunications but all of these businesses were sold in 1996. Antofagasta still owns the original railway company, plus a large trucking business and it also operates the water supply concession for the Antofagasta region, but its main business consists of three copper mines in North and central Chile which produced roughly 93% of its turnover in 2008.
Antofagasta is a family owned business; the Luksic family owns 65% of the shares and provides two of the firm's nine directors, including the Chairman. Its primary competitors are those multinational miners which have copper interests such as Anglo American (LSE: AAL), BHP Billiton (LSE: BLT), Freeport-McMoRan Copper & Gold, Rio Tinto (LSE: RIO), Vale and Xstrata (LSE: XTA).
If the thought of investing in South America causes you to reach for the proverbial bargepole, you should bear in mind that Chile is arguably South America's major success story of the twenty years. Whilst there is a vast disparity in income and wealth, as is quite common throughout South America, today's Chile is a politically stable democratic republic, operates a free market economy and lacks many of the social problems which are seen in other countries. The President of Chile, Michelle Bachelet, has approval ratings that her American and European counterparts can only dream about.
The Financials
Antofagasta produces its accounts in US dollars thus exposing UK investors to movements in the pound-dollar exchange rate. 2008 earnings per share (eps) were 173.1 cents, up from 140.2 cents in 2007 although if we remove the exceptional items the earnings fall to 85.5 cents, which reflects the fall in copper prices throughout 2008. The 2008 dividend was 60 cents; in 2003 the shares paid a dividend of 35 cents (2003 eps were 91.5 cents) so the shares have provided investors with good dividend growth.
The problems in the global economy were reflected in the 2009 half-year figures which showed a 70% fall in earnings but despite this Antofagasta's shares have strongly performers in 2009 rising from 425p at the start of the year to about 820p. Importantly, the 2009 interim dividend was unchanged.
The share prices of mining companies will often rise when their profits are falling because miners are cyclical businesses, being highly geared to the global economy. The rise in share prices is caused by the stock market pricing an earnings recovery into the shares.
This year copper prices have more than doubled to over $6,500 per tonne so the results for the second half of 2009 should be a bit better than for the first half. Brokers' forecasts for 2009 earnings per share are around 50c so at $1.65 per £1 this makes the forecast P/E ratio 27 and if Antofagasta holds the dividend at 60 cents this gives the shares a dividend yield of 4.4%.
The Outlook
Copper is an extremely important industrial metal, used throughout the world for wires, pipes and much more besides. As the global economy has come out of the recession the demand for copper has risen strongly, particularly thanks to China and India, resulting in higher copper prices, which is good for Antofagasta.
In recent years high copper prices have led to an increasing number of copper thefts, mostly of wires or from roofs (copper gives the Statue of Liberty its colour because the rain causes the surface of its copper coating to turn into blue-green copper oxide). Something to watch for as a good indicator of strong copper prices, and thus good for the shares, is the reappearance of stories concerning copper thefts such as this and this in the national and global media.
I've owned Antofagasta shares in the past and no doubt will do so in the future having nearly bought some at the start of the year but instead choosing BHP Billiton. My loss!
More from Tony Luckett:
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> Tony owns shares in BHP Billiton, BP and Diageo.
