Morningstar | Higher Copper Prices Offset by Lower Ore Grades in Antofagasta's 1H Results; GBX 560 FVE Unchanged. See Updated Analyst Note from 14 Aug 2018
Antofagasta reported a 2018 first-half EBITDA decline of 16% year on year to $904 million. Higher copper prices were more than offset by the impact of mining lower grade ore, which led to reduced volumes and higher costs. However, management maintained 2018 annual guidance for 705,000 to 740,000 metric tons of copper production at $1.35 per pound net of by products. Although net cash costs averaged $1.52 per pound in the first half of the year, management's guidance should be achievable due to the mining of higher-quality ore in the second half of the year.Although our 2018 copper production forecast of 713,000 metric tons in unchanged, we have slightly reduced our 2018 molybdenum production volume forecast to 12,000 metric tons from 12,500. Having updated our model, our fair value estimate is unchanged at GBX 560 per share as our lower molybdenum production forecast is offset by a weakening of the pound versus the U.S. dollar since our last update. Our no-moat rating is also unchanged.
We continue to view Antofagasta as overvalued, with shares trading at nearly a 60% premium above our fair value estimate. Copper prices have fallen over the last couple months and now sit around $2.70 per pound. We forecast that copper prices will decline further over the long term as demand growth slows in China and new supply ramps up over the next few years. We maintain our 2022 copper price forecast of $2.34 per pound (in nominal terms). Given our outlook for lower copper prices, we expect Antofagasta's operating margins to fall from 40% in 2017 to 21% in 2022.
Antofagasta is a Chilean copper mining group engaged in the discovery, development and operation of copper mining assets. Co. operates four copper mines in Chile, two of which also produce significant volumes of by-products. In addition to mining, Co. has a transport division that provides rail and road cargo services in northern Chile primarily to mining customers, including to some of Co.'s own operations. Co. is organized into two business divisions based on their products: Mining and Railway and other transport services. The mining division is split by mine and exploration activity. The transport division provides rail cargo and road cargo together with a number of ancillary services.
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