With a yield of 3%, miner Antofagasta (LSE: ANTO) might not seem like a particularly exciting income share for my portfolio. But miners often raise and lower their dividends as metal prices move through a cycle over time. What does this mean for the Antofagasta dividend forecast – and my portfolio?
Strong cash generation potential
Past performance is not a guide to what will happen next. But it can be instructive nonetheless.
Antofagasta’s 3% yield is based on the 60c per share dividend it paid last year. However, that was less than half of the 2021 dividend.
That stood at $1.43 per share, which would equate to an annual yield of 7% at the current Antofagasta share price. Meanwhile, the annual dividend for 2019 was just 18c per share. That is less than 1% of the current share price.
It might seem like a bad sign that a dividend moves around so dramatically. But it is normal in some industries, including mining. Pricing changes over time, meaning free cash flows can surge or collapse in a fairly short period. Antofagasta’s policy is to pay out 100% of underlying profits per share as dividends.
What the recent past shows is that Antofagasta can pay a sizeable dividend depending on business performance. If I had bought the shares just over three years ago, when they hit a low point during the early period of the pandemic, I would have seen my holding grow over 150% in value. My shares would also now be yielding 7.4%.
Rising volumes… and costs
So where next? The dividend will continue to move around as the miner pegs it to underlying earnings per share. The key driver for earnings will be the metal prices the firm can achieve in the market.
For this year, the company expects its copper volumes to increase between 4% and 10%, gold volumes to move up by 24% to 36%, and molybdenum output to grow 3-19%.
Higher volumes should translate into a significantly higher operating profit if selling prices are maintained. Costs are going up too. Net cash costs per lb had already increased heavily last year and are expected to go up 2%, while capital expenditure will inch up 1%.
What is crucial for this year’s results and dividend is the copper price.
If it stays flat, the increased volume and associated earnings should see the dividend move up. A higher selling price could also help significantly, though if copper prices fall, the dividend could be cut.
I think a reopened global economy should be good for copper and gold demand. Copper futures are lower than a year ago, but have been edging up so far in 2023 in anticipation of higher demand.
I’m waiting
I think Antofagasta’s extensive copper operations in Chile are a competitive advantage, although I also see its concentration in one country as a risk if the operating environment there changes.
I am cautiously optimistic about the outlook for copper pricing — and therefore the Antofagasta dividend forecast.
But I think we are still in the middle of a metal pricing cycle. I prefer to buy closer to the bottom of such a cycle when mining shares are selling cheaply so, for now, I will not be adding Antofagasta to my portfolio.
