UBS said the pumping and pipeline assets at the Centinela mine could fetch between US$800mln and US$1bn, potentially crystallising some value. However, UBS added that there would be higher costs related to operating expenditure trade-offs so integrated infrastructure asset sales are only likely to be moderately accretive to net present value.
“Given Anto's potential capital expenditure (capex) commitments in our view it is not a foregone conclusion they would pay a large special dividend post a sale,” UBS said.
The investment bank thinks it is unlikely that Antofagasta would pay a dividend yield of more than 5% without a higher copper price.
If Antofagasta presses ahead with its planned expansion at Centinela and Los Pelambres, UBS reckons it will need to increase net debt to fund capex in 2021-24 so will probably pay a dividend of no more than 35% of underlying net earnings – the minimum percentage outlined the miner’s dividend policy.
“But in our view the best strategy would be to prioritise project development, increasing leverage to copper price upside vs competing with the diversified miners by paying large dividends,” UBS said.
UBS upgrades Antofagasta to 'neutral'
UBS raised its rating on the stock to ‘neutral’ from ‘sell’ and maintained a target price of 800p, saying it believes the risk vs reward has improved.
The bank thinks the company offers “low-risk exposure to copper price upside;" but does not believe its "medium-term equity story is compelling and need higher conviction on tightening in the copper market to consider becoming genuinely positive”.
On Antofagasta’s projects in Chile, UBS noted that most are brownfield and low risk but expects the returns to be mixed.
It sees the expansion at Los Pelambres adding about 90,000 tonnes of copper production but lower grades. The Centinela expansion could add 95,000 to 140,000 tonnes by the mid-2020s, lifting group production growth to 20-25% over five years, but the returns are less compelling and the project is broadly NPV neutral US$3.00 per pound.
UBS says copper price needs to rise before turning positive on Antofagasta
Last week, the mining group said copper and gold production in the year to date had slumped due to lower grades and narrowed its full-year copper production guidance.
“Anto has a robust balance sheet, a reasonable cost position and low-risk growth options; as a result, it offers relatively low-risk exposure to copper price upside and operational/financial performance should improve in 4Q18/2H18,” UBS said.
“Following share price weakness the risk vs reward is improving, but with free cash flow & dividend yields below peers we need higher conviction on a copper price to become genuinely positive.”
UBS sees the near-term copper price outlook as “balanced” until there is more certainty on the trade war between China and the US after the mid-term elections in the US.
Shares rose 1.8% to 772p in morning trading.