Antofagasta Antofagasta (ANTO) faces near-term declining production and rising costs.

It is, however, one of the few ways for investors to get significant exposure to copper prices from quality assets, notably the two key mines Los Pelambres and Esperanza.

ANTO also has a track record of delivering significant dividends to shareholders which is attractive, and the 2012 dividend declaration could influence sentiment, so selling ahead may be premature.

However, we feel that with declining production and falling grades leading to rising costs the company is fundamentally overvalued. * We have derived a target price for ANTO of 958p/share based on a combination of NPV and P/E multiples.

Typically ANTO has traded at a premium to other miners, as it has built up its production base in a top jurisdiction, been one of the few copper-focused miners and has rewarded shareholders with healthy dividends.

We have used a P/E of 14x for our valuation.

At spot commodity prices our valuation rises to 1,101p/share. * ANTO recently announced that its next project, Antucoya, is under review.

If cancelled, it could lead to a write-down (c.

US$450m).

The mine was expected to contribute by 2015, producing 80ktpa of copper cathode.

A key source of potential growth on which management is focused is in the Centinela district where the Esperanza and El Tesoro mines are located.

Proposed developments could start contributing from 2016 and add over 250ktpa of copper output by 2019.

However, there is insufficient data available to assess the economics of these developments.

There is also the potential to expand Los Pelambres. * The company has a strong balance sheet and does not face financial distress.

However, we need to see a clearer path to growth to justify a higher valuation.

Although should copper prices rally, then ANTO will respond similarly.

ANTO is thus heavily dependent on the copper price to deliver share price upside.
To access the full note please click here Analyst: Marc Elliott
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