One of the biggest fallers in the FTSE 100 this week is Chilean copper miner Antofagasta (LSE: ANTO) after a downbeat set of half-year figures.
Today I want to explain why I think sellers of this family-owned firm have acted too fast. I also want to take a look at a small-cap mining services firm which I rate as a potential buy.
Copper blues
The price of copper has fallen by about 20% so far this year. That’s not been good news for copper miners. A second concern is the risk of falling demand from China, if the Asian giant’s trade war with the US escalates.
There’s no way of knowing what will happen over the next year or two. But there’s a fairly widespread view among analysts that copper demand is likely to exceed supply from 2020, as demand from renewable energy and electric vehicles surges.
The best way to buy copper
For investors wanting a pure play on copper, I believe Antofagasta could be the best choice. This FTSE 100 firm is generally seen as a high quality, low-cost operator. In 2017, it generated an operating margin of 40% and return on capital employed of 15%. Both are decent figures.
Net cash costs were $1.52/lb during the first half of the year, compared to an average copper sale price of $3.00/lb.
Management has maintained its full-year guidance for net cash costs of $1.35/lb. This should leave plenty of room for profit, even if copper falls below its current level of $2.60/lb.
Antofagasta’s profits are helped by a strong balance sheet. Net debt was just $781m at the end of the half year. That’s just 0.3 times earnings before interest, tax, depreciation and amortisation (EBITDA). Very low indeed.
The shares now trade on 13.5 times forecast earnings, with a well-covered 3.2% dividend yield. I think this could be a rare opportunity to buy this respected miner at an attractive price.
Drilling from east to west
Africa-based drilling contractor Capital Drilling (LSE: CAPD) appears to be betting big on a mining boom in West Africa. The stock’s 9% fall today suggests that not all investors are convinced.
In its half-year results, Capital said that utilisation of its drilling fleet fell from 56% to 46% during the period, because it was busy moving drilling rigs from East to West Africa. Half-year revenue fell by 12.5% to $54.5m, compared to the same period last year.
This commitment to West Africa isn’t without risk. But Capital Drilling is an Africa specialist and has a good record of growth. Having started out in Tanzania in 2005, today the company has a fleet of 94 drilling rigs.
The company also has $3.4m of net cash on the balance sheet, despite the recent mining downturn. Profitability is generally good and operating margins have now returned to double-digits, hitting 10.6% during the first half.
Buy ahead of new growth
Capital Drilling’s management says that there’s a growing level of mining activity in West Africa. It signed three new contracts in the region during the first half and expects rig utilisation to improve during the second half of the year.
After today’s fall, this stock trades on 13 times forecast earnings with a well-supported 4% dividend yield. I believe now could be the right time to buy, ahead of the next stage of growth.
