Shares in Antofagasta PLC (LON:ANTO) have dropped more than 20% from their peak this month making the Chilean copper producer look fair value, said Peel Hunt analyst John Gilbert.
“Rising political pressure in Chile to review and reset mining taxation rates has seen ANTO’s share price sell off sharply through May,” he said.
Peel Hunt reduced its target multiple to account for the increased political uncertainty, and found the shares look fair value on its revised 1,520p target price, down from 1,615p, and so upgraded its recommendation from ‘Reduce’ to ‘Hold’.
“Increased supply uncertainty is likely to support the share price through sustained strong copper prices, and we see 21% upside to a top-of-the-cycle multiple at present spot copper prices,” Gilbert said.
“Signals that the Chilean Senate may look at revising mining royalties has seen ANTO’s share price fall over 20% from its early May peak. This moves the shares to fair value, in our view, after what we consider expensive levels for much of the year so far."
Peel Hunt said it sees fair value at around 1850p, indicating that as copper markets tighten Antofagasta’s shares are likely to recover the recent losses, even with this royalty uncertainty.
The shares were priced at 1490.5p in mid-morning trading.
“The current Chilean royalty system applies a sliding scale of rates depending on the mine-site EBIT margin. It may be that with higher copper prices triggering higher royalty rates for 2021, pressure on the industry to contribute more to the government’s coffers may ease," said Gilbert.
“We estimate that in 2021E ANTO will pay c.$220m in royalties, up from the US$106m charge levied in 2020. If present spot prices persist, then the royalty payment would increase to over US$340m. A 3% revenue royalty would raise similar amounts.
“In a worst-case scenario, assuming the revenue royalty is added on top of the existing levies, our risked DCF valuation would fall c.95p.
“Should the current system be replaced with 3% revenue royalty, but not deductible for corporation taxes (unlike royalties under the current scheme), the impact would be 80p.
“At this point we are not changing estimates, rather we reduce our target price from 1,615p to 1520p, reflecting the worst-case impact from the potential new royalty,” said Gilbert.