In a recent piece I discussed Anglo American and spoke about how, along with its iron ore and coal operations, a depressed outlook for the copper price threatens to pressure earnings in the near term and beyond.
Clearly, this bodes ill for dedicated red-metal miner Antofagasta (LSE: ANTO) too, another FTSE 100 share that’s been on the back foot in recent weeks as Dr Copper prices have reversed. A mountain of poor economic data has conspired to depress prices of many commodities, copper for instance plummeting back towards two-year lows around $5,500 per tonne hit back in September.
Demand worries rise
Red metal stocks at London Metal Exchange warehouses might be falling, but overall the supply/demand picture looks pretty bleak. It’s true that copper production has faltered this year on the back of operational and weather-related disruptions among major mining nations like Chile and Indonesia. Indeed, according to the International Copper Study Group (ICSG), total production of refined copper fell around 1% in the first half of 2019 to 11.7m tonnes.
However, the rate at which global production has dropped fell by the same percentage (to 12m tonnes) over the period. And while the market is in rough balance today, fears abound that the balance is about to tip in favour of oversupply as we move into 2020, given the rapid deterioration more recently in global manufacturing activity.
Cheerily for Antofagasta investors, however, production at the Chilean miner has been much more impressive than many of its peers (indeed, total production from the South American country reversed 1.4% in the first eight months of 2019). Output at the company has surged on the back of increased throughput and better grades at assets like its mega Centinela complex. At group level, production was up 22.2% year-on-year, in fact. No wonder that City analysts are expecting earnings at the Footsie firm to balloon 16% in 2019.
A word of warning, though: the worrisome outlook for copper demand is also reflected in City forecasts. Sure, output might be rising but growing speculation surrounding market oversupply leads brokers to predicted a 5% profits drop in 2020 amid an estimated copper price slump.
And in my opinion, Antofagasta’s worries stretch well beyond the short-to-medium term.
The market may have benefitted from some project delays such as those at Rio Tinto’s Oyu Tolgoi monster project in Mongolia, as well as output suspensions such as the one we’ve seen at Glencore’s Mutanda in the Democratic Republic of Congo. But broadly speaking, global production is still likely to rise significantly into the next decade at least, casting a pall over copper prices for that period. Indeed, Chilean state miner Codelco (and the world’s largest producer) late last year launched a $39bn, 10-year plan to turbocharge copper output over the coming decades.
There’s a lot to like about Antofagasta at current share prices. As well as dealing on a bargain-basement forward price-to-earnings growth (PEG) ratio of 1.1 it also carries an inflation-beating 2.8% dividend yield. But these numbers aren’t enough to encourage me to invest. In fact, if I were a shareholder, I’d sell out today and buy one of London’s big-paying dividend stocks for my ISA.