🕐20.03.14 - 11:00 Uhr

INVESTEC: ANTOFAGASTA : ONE FOR TOMORROW... - SELL



Antofagasta (Price: 829p | Target: 726p | Rec: Sell) We have reduced our target price for Antofagasta after Tuesday’s results highlighted the likelihood of declining cash flows in the years ahead due to higher costs and capex, with negligible near-term growth.

This is even without factoring in potential pressure from weaker copper prices, which have fallen sharply recently.

A repetition of the final 86.1cps dividend, an effective pay-out ratio of 142%, will be challenging in our view – particularly in light of capital programmes ahead, c.US$6bn by FY18E.

Sell retained. * Antofagasta’s investment programme is clearly looking at the long term with heavy investment in a more depressed commodity priced environment when cash flow is likely to be more constrained.

This does position the company for a recovery in copper markets as it starts to deliver material growth from FY16E, with scope to add significantly, such as the CMD (Centinela Mining District: US$2.7bn 140ktpa Cu) project and possible doubling of throughput at Los Pelambres.

However, as it stands, we see the balance sheet and earnings coming under pressure in the medium term, thereby reducing potential for similar material dividends as seen for FY12 and FY13.

If copper prices do not recover, we expect Antofagasta to move into net debt by year-end as it proceeds with capital programmes. * The investment programme is counter cyclical, with capex increasing in worsening market conditions.

This is not necessarily a faulty strategy and in the long run should add value for shareholders.

However, we continue to believe that the company trades above shorter term fair value as it faces a weakening balance sheet and considerable delivery risk on its capital programmes. * Our target price of 726p (previously 753p) is derived from a 50:50 mix of NPV and 15x P/E multiple applied to FY14E earnings.

Key risks include mining and commodity price volatility.
To access the full note please click here Analyst: Marc Elliott +44 (0)20 7597 5189
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