The world is being electrified — and that means it needs more copper. Whether it is homes being wired up in developing markets, subsea links being built to trade renewable power across Europe, or the much-vaunted electric vehicle revolution (each car requiring four times as much copper as a conventional one), it all points to a long-term need for more of the metal (Emily Gosden writes).
Step forward Antofagasta. The company, which listed in London in 1888 to build a railway from Chile to Bolivia, now operates four copper mines in Chile with about 6,200 staff and 15,000 contractors.
It is the only “pure-play” copper producer in the FTSE 100 (though its mines also produce gold, silver and molybdenum as by-products, and it retains a small transport division).
As such it should be well-placed to capitalise on increased demand for copper, which most in the industry believe will soon outstrip supply.
Yesterday, however, it was firmly out of favour after reporting significantly worse than expected first-half results. Pre-tax profits were down 32 per cent to $466 million, as lower output and higher costs more than offset higher prices, while the earnings measure watched by analysts came in almost 8 per cent below expectations. The shares sank 7 per cent. So what went wrong?
The drop in copper output, which Antofagasta had already disclosed, stemmed from a combination of mining lower grades — parts of the ore that are less rich in copper — at its Centinela mine, and a pipeline blockage at Los Pelambres mine. The issues appear to be temporary: operations at Centinela have already moved on to significantly more copper-rich parts, and a stockpile built up during the blockage should be sold in the second half. Ivan Arriagada, chief executive, appeared confident that it would improve sufficiently to hit its full-year production guidance of 705,000 to 740,000 tonnes (up from 704,300 a year earlier), though some analysts remain sceptical.
Then there are the rising costs. Antofagasta had already disclosed that the net cash cost of copper production increased by more than a fifth to $1.52/lb, well above full-year guidance of $1.35/lb. This looks bad, but Mr Arriagada said that about 80 per cent of it was due to the lower output, which meant fixed overheads were spread over fewer units.
The remainder appears to be due to currency impacts and short-term supply issues with acid used in mining. Mr Arriagada said it should hit its full-year cost target, although this is subject to currency and molybdenum prices (since revenues from by-products reduce the net costs of copper production).
Analysts seemed to be spooked in particular by rising non-production costs: exploration and corporate expenses were higher than expected.
Exploration is to be welcomed, but adds further uncertainty to the full-year profit outlook at a time when the company is already facing short-term headwinds in copper markets. Traders are jittery over the potential for US-China trade wars to hit demand and while Mr Arriagada said he had not seen any effect that did not stop it knocking prices.
Long-term, his conviction in rising copper demand looks a sound one, and Antofagasta offers exposure to ensuring price upside. Its production growth in coming years is unlikely to be stellar — proposed projects offer incremental rather than transformational expansion — but Chile offers a fairly stable operating regime. Strikes are the biggest threat, but the miner has concluded labour negotiations for this year.
Compared with Glencore, say, which touts its exposure to copper as well as cobalt, Antofagasta’s growth prospects are rather less exciting. But when exciting involves the Democratic Republic of Congo, with all its myriad risks, there’s something to be said for boring but reliable.
ADVICE Hold
WHY Short-term risks over 2018 performance and trade wars hitting prices, but longer-term upside from exposure to rising copper demand
JPJ Group
It’s had almost as many names as the rapper Sean Combs (aka P. Diddy, Puff Daddy, Puffy). When the online bingo operator Intertain decided to move its listing from Toronto a couple of years ago, it changed its name to Jackpotjoy, its biggest brand, then in June cut it to JPJ Group (Dominic Walsh writes).
Such name changes can be irritating, but in the case of JPJ they serve to put further clear blue water between today’s company and the one that was laden with so-called legacy issues, including an eye-watering earnout payment on its acquisition of the Jackpotjoy and Starspins brands from Gamesys in 2015, expensive debt funding and uncomfortable links to short-selling and insider trading cases.
With Neil Goulden, the former Gala Coral boss, at the helm as executive chairman, the company has been cleaned up and the final Gamesys earnout payment of £58.5 million was recently “comfortably met from existing cash balances”. Throw in yesterday’s sale of its social gaming business for £18.1 million, and the decks have been well and truly cleared.
Its half-year results threw up few surprises, with total gaming revenues up 10 per cent to £161.1 million and underlying earnings falling by 4 per cent to £56.9 million on the back of a planned increase in marketing and the imposition of the point-of-consumption tax to gross gaming revenues.
Growth in the UK, which accounts for 60 per cent of the group’s revenues, slowed because of the introduction of tighter regulations on responsible gambling and proceeds of crime. Mr Goulden is taking steps to reduce the group’s reliance on the UK. The company has established businesses in Spain and Sweden and is accelerating growth in Denmark, Germany and Switzerland while planning entries into two new markets.
Having made its final earnout payment, JPJ can use its strong cashflow to deleverage. Once it has cut its net debt ratio from 3.4 times’ earnings to 2.5, it plans to use its cashflow to pursue mergers and acquisitions and return cash to shareholders. This should mean the payment of its first dividend at the end of this year.
ADVICE Hold
WHY There should be a boost from FTSE 250 status and M&A
