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Hobson: Mining Investing's Golden Rules

THE WEEK: Morningstar columnist Rodney Hobson looks at the investing case for copper and gold miner Antofagasta, whose shares have fluctuated around 900p in the last two years

Rodney Hobson 26 April, 2019 | 10:08AM

Mining

Assessing mining companies as investment opportunities is something of a minefield. Rarely if ever does a metal or mineral exist in isolation so you have to work out the potential returns from two or more products. Then there’s the amount of ore in the ground to consider and its quality. You may have only a sketchy idea how far or how wide a seam will run. And all that is before you even start to think about the price that the product can command.

Mining companies commendably produce complex tables of ore grades and production with each quarterly update but you need a degree in metallurgy to understand them. However, it is possible to make a decent stab of it by following the golden rule: is the company doing better or worse than at the same stage last year?

Antofagasta (ANTO) is best known as a copper producer but it also digs up a quantity of gold, which is always a good second string to have, and some molybdenum.

The first quarter of 2019 was distinctly better than the start to last year, with copper production 22.6% higher thanks partly to better grades at the Centinela mine, which also accounted for an almost doubling of gold production. Molybdenum output was a more modest, but quite welcome, 12.9% higher. As an extra boost, the cost of mining was well down on a similar basis.

Alas, the figures still came as a bit of a disappointment as output was down and cost were up compared with the previous record quarter. And there’s the rub. You tend to get exaggerated swings as production costs per tonne are in inverse proportion to output quantities.

Also, the quarter worked out much as the company expected and guidance for the full year is unchanged, so there was no hidden extra boost to tempt investors.

The spot price of copper currently stands at around $6,360, having started the year at $5,700, but that’s still a far cry from the halcyon days of 2011 when it looked set to top $10,000. The chart over the past 10 years is not for the faint hearted.

After falling heavily in 2012, gold has been comparatively stable around $1,200 for the past six years but, as with copper, this is a factor that Antofagasta has no control over.

The shares have fluctuated around 900p over the past two years and they currently stand at around 930p. It’s not a wildly obvious buy based on fundamentals. Antofagasta’s price/earnings ratio of 23 is quite high for the mining sector but the yield of 3.6% based on the total dividend of 43.8 cents and an exchange rate of $1.3 to the pound is fine. My big concern is that the dividend cover is only 1.2 times, which is worryingly thin when earnings are at the mercy of metal price fluctuations.

Global growth is weak and the US and Europe are slowing so demand for copper may well ease off, dragging down the price. The latest lurch in US President Donald Trump’s quixotic foreign and economic policy has sent oil prices higher, which will hold back economic growth.

I feel the downside risk for Antofagasta shares is far greater than the upside potential. I wouldn’t be surprised if they slip below 900p soon and the potential floor is 850p.

Don't Chase RBS Shares

Reality check from Royal Bank of Scotland (RBS), where profits were down in the first quarter despite a reduction in expenses. In the context of RBS over the past 11 uncomfortable years the figures aren’t bad but there is a warning that Brexit uncertainty “and associated delay in business borrowing decisions, is likely to make income growth more challenging in the near term”.

The way RBS has treated its business customers, the surprise is that anyone wants to borrow from the bank at all but this is a warning to investors not to chase the shares higher. As the latest bank reporting season gets underway, remember there are better prospects in the sector.

Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice, nor are they the opinions of Morningstar.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Antofagasta PLC867.40 GBX0.23
The Royal Bank of Scotland Group PLC238.30 GBX2.63

About Author

Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.

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