With the potential to produce 200,000 tonnes of copper and 250,000 ounces of gold each year and an estimated mine life of more than half a century, the Reko Diq project ranks as one of the world’s largest untapped copper and gold resources (Emily Gosden writes). Less favourably, the ore lies in a remote, inhospitable mountainous area of Pakistan near the borders with Afghanistan and Iran, where temperatures soar to 50C in summer and plunge to -10C in winter.
Those conditions were never likely to make Reko Diq easy to develop. But back in 2011, with copper prices trading at highs around $10,000 a tonne, it looked like the estimated $3.3 billion project could be a risk worth taking. Antofagasta and Barrick, which had invested hundreds of millions of dollars on the jointly owned project, were understandably aggrieved, therefore, when the local Balochistan provincial government unexpectedly refused to grant a mining lease that they needed to proceed.
Fast-forward eight years and Reko Diq was, as analysts at Investec put it, “all but forgotten”, with Antofagasta focused on Chile. The FTSE 100 company owns four mines in the country and in 2018 generated revenues of $4.7 billion by producing a record 725,000 tonnes of copper.
Last summer, Tempus recommended holding the shares as “boring but reliable”. The abandoned venture in Pakistan, which could not be described as either of those things, featured nowhere in the investment case. Then, on Friday night, Reko Diq shot back on to the radar of Antofagasta investors after the companies said that their joint venture had been awarded $6 billion in damages in an international arbitration process that had been rumbling on since the 2011 decision.
On the face of it, it’s good news — and shares in Antofagasta rose by 4 per cent yesterday — but this is no straightforward $3 billion windfall for the copper miner. Indeed, although the arbitration is binding, it remains unclear how much — if any — of the cash the companies will see. Put simply, Pakistan doesn’t have $6 billion in loose change ready to cough up. BMO yesterday described the sum as “unfeasibly high”.
In apparent recognition of this, Antofagasta said yesterday that it would not book the proceeds “until received”, while Tethyan, its joint venture company, said that it was willing to “discuss the potential for a negotiated settlement with Pakistan”.
What could that entail? Antofagasta is unlikely to be clamouring to revive the Reko Diq project. As Paul Gait, a Bernstein analyst, highlights, the political landscape has changed, there is a “very different commodity price point” today and investors may have little appetite for such an obviously risky project, especially when the original $3 billion estimate now looks unrealistically low. It appears more likely that the companies may accept a significantly lesser sum in return for prompt payment.
All of which leaves Antofagasta much where it was before: continuing to pursue incremental rather than transformational growth at its Chilean mines, and offering investors a relatively low-risk way of betting on copper prices. Copper has been buffeted over the past year by the US-China trade dispute and fears of economic slowdown, but the longer-term fundamentals appear to remain strong. It will be a critical commodity to enable the electrification of transport and most analysts see a supply gap opening up in the medium term. That’s why global integrated miners are focusing their expansion efforts on the metal — and why Antofagasta remains worth holding on to, irrespective of the Pakistan arbitration result.
ADVICE Hold
WHY Pakistan ruling could provide bonus but is a distraction from the core Chilean investment case
Craneware
Even among its more reliable performers, Aim is a market that’s not always for the faint-hearted (Greig Cameron writes). Share prices can swing wildly, as investors on Craneware found at the end of last month, when the software provider’s stock fell by 35 per cent after it said that sales in the second half of its financial year had been weaker than expected.
Yet Craneware has an enviably solid track record, one, perhaps, that you’d think would mitigate against such a sharp reaction. Founded in 1999 and floated in 2007, it regularly has boosted both revenue and profit. It makes systems that help American healthcare providers to monitor revenue and to analyse financial, operational and clinical trends. It estimates that about one in three hospitals in the United States use at least one of its products.
At its interim results, covering the six months to the end of December, the Edinburgh-based Craneware announced a 15 per cent rise in revenue to $35.8 million and a 20 per cent increase in underlying profit to $11.6 million. Its interim dividend was lifted by 10 per cent to 11p for the period. The more recent trading update suggested that revenue for the 12 months to the end of June would be up by about 6 per cent and underlying profit by 10 per cent. The introduction of several new products on to its cloud computing platform was given as the reason for the slower sales. Keith Neilson, co-founder and chief executive, still has “high levels of confidence” in the future performance of the group, in spite of the “short-term” issues.
Before the trading update, Craneware shares were at £29.40 and they fell to £19 by the close of that day. Since then, they have fallen as low as £17.20, although the stock has been changing hands at more than £18 in recent days. In March, the company had $38.7 million of cash, so its dividend is well covered and it has the ability to make acquisitions.
For the three years to June 2021, it has more than $196 million of revenue booked, so the core business looks in good shape. If its new products start to gain traction, the recent decline in the share price may look like a good buying opportunity.
ADVICE Buy
WHY Long-term roadmap looks promising with the prospect of further healthy dividend increases
