When I last reviewed Antofagasta in January, mining stocks had endured a tough 2012. This year has been even worse. Antofagasta is down 27% year-to-date to just £8.46. Over the same period, the FTSE 100 rose 11%. I’m glad I decided against buying it in January, but should I buy it today?
Like every commodity stock, this Chilean-based copper and gold mining giant is a play on China — but China is going through a sticky time. The days of double-digit GDP growth are over, possibly for good. Government stimulus is losing traction, and pumping up asset bubbles (property prices in Beijing, Shanghai and Shenzhen rose 18% in the past year). Ratings agency Fitch recently warned that its credit-fuelled expansion could run out of control. It could all end messily. Are falling commodity stocks the canary in the coal mine?
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On the other hand, there has been good in good economic news from China lately, with exports rising 7.2% over the past 12 months, and Q3 GDP growth forecast to be around 7.6%. And worries over a Chinese hard landing are partly reflected in Antofagasta’s share price. A 15.5% fall in realised copper prices hit Antofagasta’s first-half results, which saw its revenue fall 13% to $2.78bn, despite an 8.4% rise in production to 364,100 tonnes. Profits fell 31% to $1.275m, as costs rose. Antofagasta is on target to hit its copper production figure of 700,000 tonnes this year, but what does that matter if fewer people are buying it?
Antofagasta still digs up plenty of cash, and management was happy to lift the interim dividend by 4.7% to 8.9 cents. But its current 1.5% yield (covered a whopping 6.7 times) looks disappointing against mining giants BHP Billiton (3.9%) and Rio Tinto (3.36%). That matters, because as growth prospects recede, loyal investors deserve to be rewarded for their patience.
Hard hats required
Antofagasta’s forecast earnings per share is showing a raging 34% drop in 2013, but that calms to 2% next year. So now could be a buying opportunity, if you’re feeling brave. There is one number that tempts me. Back in January, Antofagasta was trading at 15.8 times earnings. Today, you can buy it for 9.4 times earnings. This compares to 13.4 times earnings for BHP Billiton and 9.9 times for Rio Tinto. If you’re tempted, don your hard hat, and watch out for falling metals.