Production issues weigh on Antofagasta shares ahead of H1 update

After a strong performance last year, 2022 has been increasingly challenging for Chilean copper miner Antofagasta. Analysts share similarly mixed views on the stock ahead of its H1 update on 11 August, as a downgraded outlook could be offset by a FTSE 100-topping dividend yield.

After posting weak results in its second-quarter trading update, investors will be hoping copper miner Antofagasta [ANTO.L] has a more positive outlook in its H1 interim update on 11 August.

While rising demand helped bring copper prices higher, the impact of Russia’s war in Ukraine, lockdowns in China and supply issues have all weighed on precious metals miners in the second quarter of the year. As a result of these factors, as well as production issues, Antofagasta downgraded its guidance for the full year.

At the close on 8 August, shares in the company were down 5.7% year-to-date. Given that the stock has fallen 16.1% in the past 12 months, investors will be looking to see whether its upcoming earnings announcement will spark a turnaround in these fortunes.

Antofagasta downgrades full-year outlook

Antofagasta reported a strong set of results last year as rising commodity prices around the world helped bring revenues up 46% to $7.5bn. EBITDA also grew 77% to $4.8bn and pre-tax profits grew 146% to $3.5bn.

Speaking on dividends, CEO Iván Arriagada said: “Following the successful performance of the Company and considering our robust balance sheet and the continued strong copper price, the Board has declared a final dividend of 118.9 cents per share.” This took the total payout for the year to $1.4bn.

However, when the company updated investors with a quarterly production report in July, the outlook was much bleaker. Antofagasta revised its full-year guidance as group copper production fell year-over-year across both the second quarter (by 6.5%) and the half year (by 25.7%) to 129,800 tonnes and 268,600 tonnes, respectively.

The reduced performances were largely attributed to a leak at its Los Pelambres asset in Chile, which cut production by approximately 23,000 tonnes as its operations were hampered for the majority of the period. Drought conditions in Chile have also contributed to the company’s underperformance.

Speaking at the July update, Arriagada stated: “Following the pipeline incident at Los Pelambres, and the continued uncertainty about water availability, full year copper production is now expected to be 640–660,000 tonnes. The impact of this and the high current levels of inflation are partially offset by the weakening of the Chilean peso and we now estimate full year net cash cost guidance at $1.65/lb.”

High yield could entice investors

Coming off the back of its reduced performance, investor confidence surrounding the stock may have weakened.

With this said, one pull is its substantial dividend yield. With the painful rise in living costs continuing to impact global markets, as inflation reached a new 40-year high in June for the UK, its high yield is an enticing proposition. The stock is one of the highest yielders in the FTSE 100, with a current dividend of around 9.6%. The business has worked to increase dividends in recent times. Any update on this in the upcoming results will be a boost for investors.

The business is also finalising the expansion of its Los Pelambres mine. The firm stated in its second-quarter update that the project was 82% completed. And, despite the $2.2bn cost, the move will add over 60,000 tonnes of copper a year to its operations.

More generally, Antofagasta will be looking to China in hope that Covid-19 threats will not hinder the large demand the country requires as it continues to expand its infrastructure.

Majority of analysts deem Antofagasta a ‘hold’

Despite its weaker outlook, analysts across the board share a similar stance on the stock.

According to the Financial Times, 17 analysts offering 12-month price targets for Antofagasta have a median target of 1,287p, with a high of 1,609p and a low of 990p — an average 8.2% upside on its 8 August closing price of 1,189p. The consensus recommendation for the stock is ‘hold’.

Analysts offering price targets on TheWall Street Journal have an average target of 1,534p, representing a considerable upside on its 8 August closing price. Similarly, the consensus recommendation for Antofagasta is ‘hold’.