Advertisement

Even after its recent share price surge, this stock offers good value for money

Antofagasta Copper - Ivan Alvarado/Reuters
Antofagasta Copper - Ivan Alvarado/Reuters

Over recent months, economists have been queuing up to offer downbeat growth forecasts for the world economy. A combination of rampant inflation, rapidly rising interest rates, geopolitical challenges and Covid have degraded near-term global growth prospects. The world seems to be talking itself into a prolonged recession.

Normally, this would be expected to prompt a slump in the price of commodities such as copper. After all, the metal is heavily used in areas such as equipment manufacturing, building construction, infrastructure and transport, where demand is likely to fall during a global economic slowdown.

However, the price of copper has soared at the same time as the world economic outlook has deteriorated. It has risen by around 22pc over the past three months, thanks largely to supply problems that are likely to persist in one form or another over the long run.

It’s true that recent labour and weather-related challenges are very likely to abate. But a major lack of investment in exploration over recent years, which has led to few major discoveries, and long lead times for new mines mean that the supply of copper is unlikely to keep pace with demand growth in the coming years. This is likely to act as a support for the copper price and provide a fillip for copper miners such as this column’s previous recommendation Antofagasta.

The company’s shares have followed the copper price higher over recent months and are now 14pc higher than their price at the time of our original tip in August 2021. In doing so, they have outperformed the FTSE 100 by six percentage points.

The company’s fourth-quarter production update, published earlier this month, showed that it achieved revised full-year guidance to produce 646,200 tonnes of copper during the year. It expects to produce between 670,000 and 710,000 tonnes this year, with net cash costs per pound expected to remain roughly in line with those incurred in 2022 despite ongoing extreme global inflation, which has prompted higher input costs.

Production could rise to as much as 900,000 tonnes per year by 2026 if the company decides to proceed with a second concentrator at its Centinela operation. It has the financial means not only to expand production in the coming years as part of a five-year plan but also to overcome short-term challenges that may disrupt production in the meantime. Its net-debt-to-equity ratio, for example, is around 5pc and net interest costs were covered 64 times by operating profits in the first half of the year.

In tandem with limited supply, growing demand for copper is likely to support a rising price for the metal and higher profits for Antofagasta. Although many commentators assume that the world economy’s growth rate will slow markedly in the coming months, China’s reopening following the end of its zero-Covid policy and a less hawkish Federal Reserve could mean that any deterioration in global growth is less pronounced than widely expected.

And while an era of normalised interest rates may mean the world’s net zero ambitions are moderated, since debt-fuelled spending and investment will almost inevitably become more limited, demand for copper is likely to rise as electric vehicles and renewable energy infrastructure gradually become more widespread. Furthermore, the global economy’s solid record of recovery from even its worst downturns means demand for copper from cyclical industries such as construction is likely ultimately to return to previous levels.

Even after its recent share price surge, Antofagasta continues to offer good value for money based on its long-term prospects. Its price-to-earnings ratio of 15 suggests it offers a margin of safety relative to other FTSE 100 shares while the index flirts with an all-time high.

Although the company faces a more uncertain global economic outlook than at the time of our initial recommendation, the prospects for the copper price remain upbeat. Antofagasta is well placed to capitalise on them, with its solid finances and attractive valuation evidencing its continued investment appeal. Keep buying.

Questor says: buy
Ticker: ANTO
Share price at close: £17.65

Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 6am.

Read Questor’s rules of investment before you follow our tips.