I’ve long been reluctant to invest my hard-earned cash in UK mining share Antofagasta (LSE: ANTO). I’ve feared what could happen to metal prices as new mega mines and project extensions come on board over the next few years.
Some compelling data in recent weeks surrounding the copper supply and demand dynamic has forced me to revisit my view for red metal prices, however. And with it I have revised my feelings for producers like Antofagasta. Copper stocks held at London Metal Exchange (LME) inventories recently sank to their lowest for 15 years. This helped the red metal climb to its most expensive since early 2012 at around $8,440 per tonne.
Copper demand to fly?
There are plenty of people who think that base metal demand could soar over the next few years too.
Will Walker-Arnott, senior investment manager at Charles Stanley, notes that “we may be entering a commodity ‘supercycle’ based on the premise that we’re going to see a lot more infrastructure spending from governments around the world.” And the boffins at Goldman Sachs reckon that copper will break the $10,000 a tonne barrier for only the second time by the end of 2022.
This goes to explain why City analysts reckon Antofagasta’s earnings will soar 76% year-on-year in 2021. It’s a forecast that leaves the UK mining share trading on a rock-bottom price-to-earnings growth (PEG) ratio of 0.3. A reminder that any reading below 1 can suggest that a stock is undervalued based on predicted earnings.
Buyer beware
Of course there are still big risks associated with Antofagasta. Copper stocks at LME warehouses have fallen recently thanks to lower global supply in 2020. But metal production is expected to bounce back this year. And output looks likely to grow steadily over the next decade too.
Fitch reckoned in summer 2019 that worldwide copper supply would rise at an average of 3.5% a year through to 2028. Covid-19 could have thrown these projections a little off course. But the trend is still likely to be heading upwards.
And like any UK share, there is always the danger that profits can miss broker forecasts. Mining companies face the prospect of commodity price weakness as well as huge operational problems. These can include disappointing exploration results, unexpected production stoppages and declining ore grades. Antofagasta itself saw production last year fall almost 5% in 2020 due to lower grades.
A UK share on my watchlist
Finally, cost overruns can be another significant problem as Antofagasta has also found out. Just last month the company significantly lifted cost estimates for the expansion of its Los Pelambres mine in Chile. The FTSE 100 firm now expects capital costs to come in at $1.7bn due to project adjustments and Covid-19 disruption. This is around $400m more than original estimates.
It could be argued that these risks are reflected by Antofagasta’s bargain-bin valuation, however. I’m still to be totally convinced to buy this UK share in my Stocks and Shares ISA. But at current prices I’m giving it a very close look right now.