Antofagasta last month revealed a drop in gold and copper production after lower grades at the Los Pelambres and Centinela mines.
READ: Antofagasta reports 3% rise in copper production, cash costs for the year lower than estimates
While it expects copper output to grow in 2018, it continues to see another fall in gold production.
Berenberg bullish on Antofagasta
But Berenberg is optimistic, saying: “We expect the production challenges, mainly related to grades and ore hardness, to subside from 2019E, with output to rise to 800,000 tonnes in 2019-21E.”
The broker raised its rating on the stock to ‘hold’ from ‘sell’ and raised its target price to 865p from 750p as it thinks the shares look more fairly valued following a recent underperformance.
The stock is down 9% in the year-to-date in London compared to an 8% increase in the MSCI index.
“We believe that disappointing operating performance and higher costs weighed on the shares,” it said.
Encuentro Oxides and Los Pelambres to support growth
Berenberg predicts near-term growth from the ramp-up at Encuentro Oxides, which came into production in October, along with an improvement in copper ore grades.
Longer-term growth will come from the Los Pelambres mill expansion project and the second concentrator project at Centinela, the broker added.
Net debt levels at Antofagasta are on the decline but Berenberg expects capital expenditure to rise to support the development at Los Pelambres.
Antofagasta’s cash costs are creeping up due to lower grades at key operations, rising input costs and a strengthening Chilean peso.
“We expect it to maintain its position in the third quartile of the cost curve and for potential cost improvements to come through as mining transitions to higher-grade and lower ore hardness areas of the pits at Los Pelambres and Centinela,” Berenberg said.