UBS upgrades Antofagasta after sharp share price falls

UBS upgraded Antofagasta, a Chilean copper mining company, from ‘sell’ to ‘neutral’ even after the company released a weaker than expected production target for fiscal year 2017, albeit at the same time lowering the price target from 520p to 500p.

“After the release of weaker than expected FY17 production guidance we do not see material negative stock-specific catalysts on the horizon and believe the near-term copper price outlook is balanced,” said UBS analyst Daniel Major.

The expensive valuation alone is no longer enough to warrant a ‘sell’ rating following the shares significant underperformance in fiscal year 2016 and the lack of ‘clean’ copper plays.

Year-to-date stock in Antofagasta fell 12% versus a 35% gain for Bloomberg´s mining index, Major pointed out.

Major believed that the company faced structural changes from grade decline and ore hardness at Los Pelambres, but said the market was becoming increasingly aware of these challenges.

Disappointing full-year guidance for 2017 production and capital expenditures highlights the continued structural medium-term issues that the company and the Chilean copper industry face. After incorporating new guidance, the analyst downgraded his earnings estimate for 2017 and projected negative free cash flow (FCF) for the miner.

He also saw "modest" downside risk to the full-year 2016 production guidance of 710 kilotons (kt), which may be offset by slightly lower net cash costs.

Copper has materially underperformed the major mined commodities in the full year 2016 with robust demand growth offset by stronger-than-expected supply growth, mostly due to fewer disruptions. Looking into 2017 supply growth is set to slow and the analysts expect demand to remain stable. Supply constraints are likely to drive deficits and higher prices in the medium-term.

The Swiss broker trimmed its net present value (NPV) estimate for the company´s cash flows by approximately 5% to reflect weaker guidance.

Nonetheless, for those looking for leverage to copper price upside the analyst expressed his preference for Glencore and KAZ Minerals.

The share price fell 1.91% to 513p at 1047 BST on Thursday.