The City broker had expected that Antofagasta bosses would look to expand the existing Centinela operation, which would have required less upfront capital.
“We again question the capital discipline in the group following the shift to a second concentrator at Centinela as the longer-term growth project for Antofagasta,” read a note to clients.
“We believe the switch favours earnings and dividend growth over returns on capital. We estimate that in order to generate a 10% internal rate of return (IRR) the project will require copper prices to reach US$7,500 per tonne.”
The analysts added: “Due to the higher capex spending, we see Antofagasta’s returns on cash invested in the business steadily falling down the single-digit levels.”
Peel Hunt slashed its earnings per share estimates for the next three years to reflect the changes at Centinela, as well as higher-than-expected depreciation charges in the recent results statement.
Downgraded on valuation grounds
For 2019, it is forecasting adjusted underlying earnings (adj EBITDA) of US$2.58bn and earnings per share of 62 cents, down from its previous estimates of US$2.61bn and 73 cents.
But the analysts didn’t downgrade their recommendation of the stock because of that, but on valuation grounds, given the recent share price surge.
“The shares have performed strongly of late (up 27% since Jan) and are at our target price (of 920p). We downgrade to ‘hold’.”
Antofagasta shares were up 2.6% to 991p in mid-morning trading on Monday.