Antofagasta PLC (LON:ANTO) will have a good year in 2019 but this has already been baked into the share price, RBC Capital Markets said as it downgraded the stock.
Ahead of its full-year results next Tuesday, the Chilean-based miner predicted another record year of production in 2019 as it reported a strong rise in 2018 fourth quarter copper output, led by growth from Centinela.
READ: Antofagasta posts strong rise in 2018 copper production to record levels, forecasts another record year
Following a recovery in sentiment and copper prices after the positive production update, RBC said it sees the risk/reward more balanced as Antofagasta embarks on another investment phase, which is likely to compress free cash yields.
Nonetheless, it believes Antofagasta remains a "relatively straight-forward and solid exposure in the sector".
Shares fairly valued
RBC cut its recommendation to ‘sector perform’ from ‘outperform’ and lowered its target price to 850p from 890p.
"With growth delivery now coming back into the cards and the shares trading at an elevated premium to net asset value, at current share prices we think the stock is fairly valued," the broker said.
RBC sees the miner’s interim results in March beating consensus estimates by about 1%.
It expects Centinela to perform well in 2019 on higher grades, and Los Pelambres to maintain higher levels of production before the tie-in of the US$1.3bn expansion of the mine in 2020.
Los Pelambres expansion to boost production
“The Los Pelambres expansion should pick up pace in 2019,” RBC said.
“We expect this project will increase production by circa 60,000 tonnes per annum over the next 15 years (US$21,000 per annual tonne, RBC estimates 12% internal rate of return). “
“Once complete this would open up the Phase 2 expansion which has lower capital intensity for an additional 35,000 tonnes (US$14,000 per annual tonne).”
Antofagasta has previously said it anticipates a decision on the expansion of Centinela by the end of 2018 but RBC does not expect spending to begin until 2020.
A pre-feasibility study for the US-based Twin Metals project should also be close to completion, RBC pointed out.
“By no means do we see growth in copper (especially return on invested capital accretive growth) as negative, but we forecast Antofagasta with the Pelambres expansion underway to have an average 3.4% free cash flow yield over the next two years,” RBC said.
“Although there is plenty of debt capacity in Antofagasta, at this juncture we wouldn't expect any acceleration of the two growth projects.”
In mid-morning trading, shares were trading 0.6% lower at 934p each.