Cheap as copper chips?
Source: Motley Fool
metalsplace.com
On several measures, Antofagasta (LSE: ANTO) is cheap. A P/E ratio of 8, Price to Sales ratio of 3 and Net Gearing of -34% usually spells good news for investors. So I took a closer look at this £4.5 billion mining giant to see if it represents good value, as the share price (currently 482p), has risen only 3% in the past 12 months.
Fortunately for me (and for you) Antofagasta is a fairly simple company, despite its size. It has 3 mines in Chile which sell two commodity products, copper and molybdenum. A commodity product is one which is identical regardless of where and how it is produced, for example copper, oil and wheat are commodities, houses and people are not. Most commodity prices are printed daily in the Financial Times, allowing you to say knowledgably to your colleagues 'Ah, I see copper has fallen $300 per tonne.'
So, what does the future hold for Antofagasta? In my opinion, the questions which matter are: How much stuff can Antofagasta dig out of the ground? Will the cost of recovering it increase over the next few years? What price can the company get for it?
Antofagasta has not increased production dramatically over the past few years, probably because there is a limit to how much you can extract out of a single mine without digging a new hole. Antofagasta does not have any large new mines planned beyond expanding its original mines. The mines are relatively insulated from the vagaries of the Chilean economy, making production costs fairly even, although the possibility of strikes certainly exists.
The really difficult and most important question is the last one of that list, the future prices of copper and molybdenum. The ratios used to vale Antofagasta are based on guesses of the future, and this is the weakness of most ratio analysis. With commodity prices published daily, the fortunes of the company can be tracked more accurately from product prices rather than company ratios.
Last year saw the highest copper prices ever recorded and with commodity prices nearly halved compared to peaks last year, and still many times above the long term average, there is plenty of room for vast fluctuations in copper prices. The price depends on the Chinese economy and copper speculators. I'm always cautious in situations like this, growth in supply is guaranteed, growth in demand is not.
How have Antofagasta used their previous earnings? I think Antofagasta has been very intelligent and prudent with their bonus cash earned from last year. It has resisted the temptation to expand with high-cost projects that depend on a permanently high copper price and instead paid back debt, and the company now has enough cash (over $1 billion) to pay off every penny of their debt overnight.
In short, if you're willing to bet that the Chinese economic growth will continue for several more years and copper prices with it then Antofagasta may be a good investment. Personally, I think the price is still too optimistic. If it falls below £4 per share I'll be looking more closely. |
