🕐22.11.13 - 12:54 Uhr

INVESTEC: ANTOFAGASTA : MARKET COST PRESSURES RISE - SELL




Antofagasta (Price: 807p | Target: 716p | Rec: Sell) Copper concentrate producers are negotiating treatment and refining charges (TC/RCs) for 2014, and face cost increases.

Recent settlements are moving from around US$70/t and 7c/lb toward US$90/t and 9c/lb reflecting greater copper concentrate availability.

Antofagasta produces copper concentrate from its two key mines, Los Pelambres and Esperanza.

Applying higher charges reduces our valuation to 716p from 737p adding around 5c/lb in cash costs; we maintain a Sell recommendation. * Copper prices have been particularly volatile recently, falling through US$7,000/t and impacting copper equities.

Rising TC/RCs implies concentrate availability is improving, with production widely anticipated to move into surplus in 2014, albeit we do not expect excessive oversupply.

Using current spot copper and gold prices in our valuation would lower our TP to 688p. * The impact of using higher TC/RCs in our Antofagasta forecasts is to decrease FY14E EPS from 70.3cps to 66.4cps.

We maintain the same TC/RCs long term, reducing the longer term earnings profile similarly. * Further cost pressures faced by the company include a possible increase in Chilean corporation tax from 20% to 25% around March 2014 when a new government looks likely to take office.

Until settled, we do not apply this to our valuation, but the impact of this rate would be to reduce FY14E earnings further to 61.5cps and take our TP to 682p/share. * Antofagasta faces several years of high capital expenditure that will enable it to grow output post FY16E.

The balance sheet is strong (FY13E net cash US$1.86bn), but softening earnings will limit the scope for special dividends (dividends worth US$971m were paid out to shareholders for FY12).

Near term, we look toward a debt agreement on Antucoya. * We continue to value Antofagasta on a 50:50 mix of NPV and what we see as a generous 15x multiple of 1 year forward EPS.
To access the full note please click here Analyst: Marc Elliott +44 (0)20 7597 5189
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