Antofagasta chairman confident despite industry challenges

Investors in Antofagasta were gathering for the company’s annual general meeting on Wednesday, as Jean-Paul Luksic prepared to update them on the company’s operations, during a year in which copper price movements turned positive.

The FTSE 100 firm’s chairman said that over the course of 2016 the company saw copper prices stage a recovery from the lows at the beginning of the year, and that had continued into early 2017.

“This is undoubtedly good news and is reflected in our improved results for the year, but as an industry we must be careful to guard against falling back into complacency.

“Despite the considerable efforts made so far, the industry still has further to go in order to put costs back onto a sustainable footing.”

Luksic said Antofagasta’s response to those challenges had been to renew its focus on producing profitable tonnes, which he described as an “essential” part of its strategy to ensure the business would generate positive free cash flow through the cycle and generate good returns on the capital invested.

On the subject of safety, Luksic confirmed two fatalities at Antofagasta during 2016 - one at its railway division and one at the newly-commissioned Antucoya mine.

“On behalf of the board, the employees of the company - and myself - I would like to express our sincere condolences to the families of our departed colleagues.

“Our target is to achieve zero fatalities at our operations, and while our business is inherently hazardous, this is a target that we constantly strive to achieve.”

In 2016, with the backdrop of weaker commodity prices, Luksic said the company focussed on optimising its operations to ensure it remained competitive in a low-price environment.

That was not an easy task, he quipped, as Antofagasta also ramped up the newly built Antucoya mine, and began operating the Zaldívar mine which it bought a 50% stake in at the end of 2015.

“Centinela also achieved significant milestones during the year reaching its expanded throughput capacity of 105,000 tonnes per day and commissioning the new paste thickeners, which have been operating well.

“These thickeners will improve our water recovery and reduce the area needed for tailings storage.

“This is an important part of this innovative tailings management system which is the largest application of this technology in the copper industry in the world.”

During 2016, the company produced 709,400 tonnes of copper, 12.5% higher than in 2015, together with 270,900 ounces of gold and just over 7,000 tonnes of molybdenum.

Given the economic uncertainty, LME copper prices fell in comparison to the prior year and gold prices rallied as investors “took comfort in the characteristics” of that metal, Luksic explained.

“Our average realised copper price of $2.33/lb was marginally higher than in 2015, while gold was 8.7% higher and molybdenum rose 19.3%.”

Looking at the books, Luksic said revenue was 12.3% higher than in 2015 at $3.6bn, mainly as a result of higher sales volumes, but also the marginally higher realised copper price.

EBITDA for the year was $1.6bn and the EBITDA margin rose to just under 45%.

“This has been achieved by our relentless focus on reducing our operating costs, and our cash costs per pound of copper are down some 20% compared to 2015.

“Our control of capital expenditure on sustaining capital, deferred stripping and growth projects has been tight, bringing our expenditure down by some 24% to $795 million, which was below our original expectations.”

In accordance with the board’s dividend policy, the total dividend for the year was 18.4 cents per share, or $182m, which represented a 53% pay out of our underlying earnings.

“This payout ratio is above our minimum commitment of 35% and reflects our improved confidence in the position of the company and the outlook, and our wish to distribute more of the returns to shareholders.

“Our approach to allocating capital with an appropriate balance between investment, growth and dividends, has allowed the company to retain a strong position and our financial strength gave us the capacity to take advantage of opportunities over the year.”