Antofagasta (LSE:ANTO) is a FTSE 100 listed mining stock that operates in Chile. Despite Covid-19 causing significant disruptions to the mining industry, its share price has exploded by nearly 120% over the past 12 months. What’s going on? And should I consider adding it to my portfolio? Let’s take a look.
China is causing copper prices to climb
In 2020, copper inventory levels in the London Metal Exchange (LME) fell to their lowest point in the last 15 years. The supply was drastically cut due to mine closures as global lockdowns came into effect.
But recently, China has issued an enormous stimulus package to reboot its economy on a scale not seen since the 2008 financial crisis. As most of China’s economy is driven by industrial manufacturing, the demand for copper has surged, while the supply remains limited. So it’s not surprising that copper prices have risen to over $8,800/tonne – the highest it’s been in nearly 10 years.
But what does this have to do with Antofagasta? Well, if you haven’t guessed already, the FTSE 100 company is a leading supplier of copper. It has four mines in its portfolio that predominantly extract copper from the ground, as well as some other by-products such as gold, molybdenum (used to make steel alloys), and a small amount of silver.
Overall, the business looks like it’s in a powerful position to benefit from the rising copper prices. At least that’s what I think.
The risks of investing in mining stocks
Mining is a hazardous process. It requires highly skilled engineers as well as a considerable level of health and safety precautions. But despite all the protections put in place, accidents do happen, and they can be fatal. While no catastrophic events have occurred since 2012 on Antofagasta’s watch, it remains an ever-present threat to the business.
Accidents trigger significant reputational damage to the firm. But more importantly, if employees feel that their lives are in danger due to improper safety procedures, it’s unlikely they won’t complain. The mining sector is no stranger to worker strikes or even mass walkouts. Both of which disrupt operational performance.
Another risk for this business is its international operations. As the mines are in Chile, all operational costs are paid in Chilean pesos. What’s more, Antofagasta reports its sales and earnings in US dollars. Combined, this exposes the firm to fluctuating exchange rates across multiple currencies that can negatively impact the business’s performance.
Antofagasta: a FTSE 100 mining stock worth buying?
Covid-19 has undoubtedly had a significant impact on Antofagasta. For the first three quarters of 2020, metal production fell compared to quarters the previous year. However, in the last three months of 2020, its mines began exceeding normal production levels. Both copper and gold production saw double-digit growth compared to the end of 2019.
By the end of the year, overall copper production decreased by a marginal 4.7%. Not bad, considering the number of disruptions the company faced.
With copper prices on the rise, I believe Antofagasta is on track to continue thriving in 2021. And so, its definitely a stock I’ll be considering for my portfolio.