The Antofagasta (LSE: ANTO) share price opened 3% higher this morning after the FTSE 100 copper miner released a Q3 production report and its first guidance on production for 2019. While the market greeted the news positively, I see a number of reasons to rate the stock a ‘sell’ at this time. Meanwhile, British American Tobacco (LSE: BATS), which issued an ‘in-line’ trading update last week, is a stock I’d be happy to buy today.
Growth and headwinds
Antofagasta told us that Q3 copper production increased 15% quarter-on-quarter and said it expects Q4 volumes to be particularly strong. Nevertheless, it narrowed its full-year guidance to the lower end — 705,000 to 725,000 tonnes — of its earlier forecast output of between 705,000 and 740,000 tonnes. It maintained net cash cost guidance for the year at $1.35 per pound.
The company said it expects the growth in production volumes in Q3 and Q4 to continue into 2019, driven by higher average grades, particularly at its Centinela Concentrates and Zaldívar operations. Management’s guidance for copper production in 2019 is between 750,000 and 790,000 tonnes.
This near-term phase of higher average grades and output growth is clearly positive. However, as analysts at Morgan Stanley have pointed out, the group’s mine profile “implies falling grades in the medium term and faces rising rock hardness.” As a result, the company is up against headwinds to production growth and cost control.
Copper bottom line
The initial rise in Antofagasta’s shares this morning has reversed and the price of 750p, as I’m writing, is down 1% on yesterday’s close. A current-year forecast price-to-earnings (P/E) ratio of 15.6, falling to 12.1 next year, doesn’t strike me as attractive, given the medium-term headwinds.
Furthermore, there are bigger miners, trading on cheaper earnings multiples at the moment. And they also offer considerably more generous dividend yields than Antofagasta’s current-year forecast 2.9%, rising to 3.4% next year.
Excellent value
British American Tobacco’s shares are trading at 3,560p, as I’m writing. The current-year forecast P/E of 12.2 is cheaper than Antofagasta’s 15.6 and next year’s 11.2 is also cheaper than the miner’s 12.1. This strikes me as quite remarkable, given Antofagasta is in a cyclical industry and is a commodity business with no control over prices, while British American Tobacco is in a non-cyclical industry, and its popular brands and the addictive nature of its products give it significant pricing power.
The tobacco giant’s low P/E also sticks out like a sore thumb in the context of other giants in the broad consumer goods sector. P/Es of around 20, or even higher, can be found for companies such as Unilever. In fact, British American Tobacco has commanded such ratings at times in the past. But the market is currently preoccupied with things like regulatory risk for the industry and British American Tobacco’s relatively high level of debt, following its acquisition of Reynolds American last year.
However, the tobacco industry has a record of overcoming all manner of onerous headwinds in its long history. Meanwhile, the firm’s level of debt is not ideal, but the company is in the process of deleveraging and its plans are on track. These factors, together with the low P/E and a current-year forecast dividend yield of 5.6%, rising to 6% next year, persuade me that the stock offers excellent value today.
