Introduction

Antofagasta (OTC:ANFGF) remains one of the better copper companies to have exposure to in order to benefit from an anticipated strong copper price, as it has sizeable operations focusing on that specific base metal. Most of the company's assets have long mine lives which means the company can focus on operational excellence rather than exploration to increase the mine life.

I have been keeping an eye on Antofagasta for several years now, and this article is meant as an update/addition to previous coverage, considering it already has been a while since I last reviewed Antofagasta and the copper market is looking completely different now.

Antofagasta's primary listing is in London, where the company is part of the FTSE 100. The ticker symbol on the LSE is ANTO, and the average daily volume is approximately 1.5M shares. At the current share price of 2110 pence, the market cap is close to 21B GBP, which translates into a USD-equivalent of just over $26B.

2023: the year of confirmation

When looking at a base metals producer, there are only a few important factors: how much does a company produce, and at what cost? And how much cash does it need to keep all of its mining operations nicely humming along?

In 2023, Antofagasta produced just over 660,000 tonnes of copper, which represented a 2% increase compared to the previous year, thanks to the increased availability of water at the Los Pelambres mine after completing the construction of another desalination plant. This increased the amount of seawater used as a portion of its total water usage to 60%. An important metric for a company operating in Chile which has had water issues for several years now.

The 660,000 tonnes of copper represents approximately 1.45 billion pounds of copper, and the C1 production cost was approximately $1.61 per pound, in line with the production costs incurred in the previous year. The reported cash cost is net of the by-product revenue and with a total gold production of 209,000 ounces and almost 25 million pounds of molybdenum, Antofagasta generates in excess of half a billion dollars per year from these byproducts.

This resulted in a total revenue of approximately $6.3B and an operating profit of $1.78B, which is an increase of just under 10% compared to the FY 2022 revenue. That's a pretty decent operating profit, especially considering the average realized copper price was 'just' $3.89 per pound in 2023. A good price, but still in excess of 10% below the current spot price of the base metal.

And while the interest expenses increased to almost $106M, Antofagasta also recorded an increased investment income which more than tripled to $138M, coming from just over $40M. That investment income is related to the interest income (which more than doubled to $43M) but it also included a gain on liquid investments: at the end of 2023 the company had a total of $2.92B in cash and liquid investments.

Taking all these elements into consideration, Antofagasta reported a pre-tax profit of $1.8B and a net income of $1.17B. As the company doesn't have full ownership in any of its copper mines, a substantial portion of the net profit is attributable to non-controlling interests (read: the minority joint venture partners on the mine level). The net profit attributable to the shareholders of Antofagasta was $710M, for an EPS of $0.72. Including the exceptional items, the net profit attributable to the shareholders of Antofagasta was $0.85 per share.

This also translated in a pretty strong cash flow result. As the cash flow statement below shows, the company reported a total operating cash flow of $2.33B and $2.37B after also taking the lease payments and interest income into account.

The total capex was approximately $2.13B and that amount was fully covered by the operating cash flow. Keep in mind that $2.13B capex number includes all growth-related capital expenditures as well.

According to Antofagasta's management team, the total capex could be split up between $756M in sustaining capex, $793M in mine development activities and $581M in growth capex.

2024-2025: investing in additional growth

While 2023 was a decent year, it's obviously more important to have a look at the future to figure out what we can expect from Antofagasta.

First of all, the production should increase again. Antofagasta's official guidance is to produce 670,000-710,000 tonnes of copper and the midpoint of that guidance, 690,000 tonnes, would represent a 4% increase on a YoY basis. Antofagasta will continue to grow its copper output as it has an ambitious midterm target to produce 2 billion pounds per year. The cash cost should remain pretty much unchanged at $1.60 per pound (as the gold and molybdenum as by-product credits will have a positive impact to the tune of $0.65 per pound). This means that the impact of the higher copper price should be immediately noticeable on Antofagasta's bottom line result.

That being said, the total capex will increase to $2.7B in 2024 and even $3.5-3.9B in 2025, and it shouldn't be a surprise the majority is once again development and growth capex. The company's board recently signed off on the construction of a second concentrator on the Centinela copper mine and this $4.4B investment should add about 170,000 tonnes of copper-equivalent per year to the production mix while reducing the production cost thanks to operational efficiencies. The $4.4B will be spent over several years, as Antofagasta is anticipating a construction timeline from 2024 until 2027.

And during the same time frame, Antofagasta will spend an additional $1B on doubling the capacity of the Los Pelambres desalination plant to 800 liters per second. Antofagasta will score ESG-points with that investment as the increased desalination capacity means the mine will be able to source the vast majority of its water needs from seawater.

Investment thesis

From Antofagasta's perspective, the higher copper price couldn't have come at a better time. The company plans to spend in excess of $6B on capital expenditures in 2024 and 2025 and a strong operating cash flow result will go a long way in helping to fund these expansions. The anticipated production increase will also go a long way towards Antofagasta indeed achieving its anticipated production increase to 900,000 tonnes (2 billion pounds) per year.

And this means Antofagasta is still a very interesting candidate for every investor looking to increase his/her copper exposure. That being said, at the current market capitalization of just over $25B, the company isn't cheap anymore, and I'm moving my rating to a 'hold' on valuation. The stock is up 36% since my previous article, and I would now only consider re-establishing a position on weakness.

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