ANTO - Antofagasta PLC

[rishig]

Antofagasta PLC (LSE:ANTO) is a Chilean copper mining company controlled by the Luksic family. They own 65% of the company and 35% is in float on the London stock exchange. Chile is one of the largest producers of copper and Luksic family is one of the builders of this industry. The Luksic family has a very strong reputation of treating all it's stakeholders very fairly.

 

Through Antofagasta, the group owns majority interests in 4 mining operations in Chile. Les Pelambres is the largest one (60% ownership) and the other three are owned 70%. In all, the group produces 700K tonnes of copper a year and is the low end of the second quartile of copper producers. Until recently, they were in the first quartile producers, but due to recent expiration of their long term energy contracts, those prices have gone up a bit. Yet, their total net cash cost is $1.46/lb as of H1 2014. Copper prices collapsed from 2011 high of $4.5 to ~$3 currently. The 4th mine has been in operation since the 60s and is at end of life. 2015 is the last year of operation. Most of the revenue as well as EBITDA comes from the 3 mines - Les Pelambres, Esperanza and El Tesoro. The average life of these mines is more than 25 years. They recently merged the operations of Esperanza and El Tesoro to bring down costs further and purchased partial ownership in an energy company to establish new long term contracts. Arguably cash costs could come down down the line. Yet EBITDA margin is quite high on the 3 mines (in the 60% range for Les Pelambres and El Tesoro and 45% range for Esperanza).

 

The balance sheet is super conservative. It is in net cash position and management has always taken a very conservative view. They are currently doing brownfield expansions to get to 900K tonnes in production by 2018. Management stays in its circle of competence, it avoids acquisitions, expansion outside Chile, and greenfield exploration. This is quite refreshing in the world of mining where management just looks at shareholders as a source of capital while they are pursuing pie in the sky acquisitions and greenfield expansions. I look at the gold miners and see that gold went from 300$ to 1800$, yet the miners didn't create any value. My opinion is that mining is first about the people running the show and then the rest.

 

In the mining world, it's not unusual for operations to be delayed and overrun original budgets. Yet, when you look back to when Les Pelambres was built in 99 it was done before schedule and below budget. Same for Esperanza in 06. Luksic family is one of the pioneers of copper mining in Chile and they have a strong reputation in the mining world. In the 50 years of operation, there have been no labor strikes. This is incredible since Southern Copper which is a large producer of Copper in Mexico and Peru has been burried in labor disputes. Lastly, Chile is one of the best South American countries when it comes to governance and tax policies.

 

Antofagasta is trading at ~11 billion enterprise value. Stock is at close to 5 year low! If you consider that 5 years ago, production was roughly 35% lower, the drop in market value per lb of production is incredible. Mr. Market really hates Antofagasta (or any miner as such). I think this has to do with the fact that 40% of world copper is consumed by China and obviously this is a bad bet to make today as per Mr. Market.

 

My rough calculations show EBITDA attributable to shareholders is ~$2 billion. So, this is trading at about 6x EBITDA. This is at really the low end of historical copper prices. At $4 /lb copper prices, EBITDA could double, given the fixed cost nature of mining business. In the last 5 years, Antofagasta has returned $3 billion in dividends. This is all while growing production from 450K tonnes to 700K tonnes without levering the balance sheet. Compare this to Posco which has bloated its balance sheet without really adding any value to the shareholder. Thank goodness that management team is now out at Posco.

 

Lastly, Tweedy Browne and Third Avenue International both have been buying Antofagasta. I am still on the sidelines as I read more and wait for a more attractive price.

 

Would love to hear any thoughts.

 

- Rishi

 

[MrB]

Anyone kind enough to share the latest VIC report pls?

[LongHaul]

I would think about China's effect on copper demand.  Personally I think China has a massive boom that will bust and China is a huge consumer of copper.  I would normalize demand at a conservative level.

[dustin_johnson25]

Happy to hear questions, comments or disagreement. 

Antofagasta_Short.pdf

Antofagasta_Short.pdf

[Sunrider]

I would think about China's effect on copper demand.  Personally I think China has a massive boom that will bust and China is a huge consumer of copper.  I would normalize demand at a conservative level.

 

If you're looking to invest in copper, why not with a low cost producer? Imperial Metals all-in cost is apparently around $1.1 or a bit lower.