The Antagofagasta (LSE: ANTO) share price is weak this morning (17 July) on the release of the FTSE 100 firm’s second-quarter production report.
In Q2, the copper miner and transport operator increased production by 20%. However, the whole of 2024 will likely come in at “the lower end” of previous guidance.
The stock’s been dropping since May, but so has the price of copper. It makes sense for the shares to cycle a bit with the value of the metal. However, investors may also have seen the lower production figures coming. After all, the stock market almost always looks ahead.
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Consistent investment in operations
This news is a bit of a blow though. Despite recent weakness, the price of copper and the stock are within a whisker of their highs. With elevated selling prices, the ideal scenario would be for Antofagasta to be producing copper at a blistering pace.
If cyclical companies don’t maximise their earnings and cash balances during the easy times, it’s harder for them to survive the lean times.
However, mining operations can be complex and capital-intensive. Setbacks are common, and project lead-times can be long.
Chief executive Iván Arriagada outlined some of the firm’s recent challenges. The company achieved the 20% increase in production despite lower grades at both its Los Pelambres and Centinela projects in Chile.
At Los Pelambres, a recently completed phase 1 expansion product helped the firm achieve higher ore processing volumes in the second quarter. But at Centinela, second-quarter production reflected lower recoveries because of “elevated levels of clay and fines in ores processed”.
It all strikes me as being a bit like a giant game of snakes and ladders! But then again, many businesses are like that.
Looking ahead, Arriagada is optimistic about Antofagasta’s future. Because of “consistent” investment throughout the commodity cycle, the firm has built a portfolio of “high-quality, long-life” operations.
Arriagada reckons recent investments will add growth and long-term security to the future of the company’s portfolio. Meanwhile, there’s “strong and widespread recognition” of copper’s fundamental role in the transition to cleaner energy.
The risk from cyclicality
But can Antofagasta make a decent investment for investors from where it is today. Perhaps, but it’s risky.
I always get a bit nervous when commodity company share prices and the underlying resources are near their highs. That’s the case now with Antofagasta and the price of copper.
There’s no denying the fierce cyclicality in the sector. By their nature, cycles move up and down. The Antofagasta share price and copper could move further down from here.
On top of that, there’s the ongoing risk of operational problems causing a decline in production leading to falling revenue and earnings.
Nevertheless, I’m bullish about the outlook for businesses in general, and a high copper price often means better economic times are on the way.
However, Antofagasta has a patchy multi-year trading and financial record. So at these elevated levels for the share price and copper, it may be wise for shareholders to be vigilant. I consider it to be one to watch for the time being rather than one to buy immediately.
