Peel Hunt downgrades Antofagasta, but shares up on copper rebound

The broker said it could still see upside to the shares, but set its target price at 425p, below its discounted cash flow valuation of 494p.

For the stock to approach 500p this "requires the market to price in either materially higher copper prices and/or substantially better capital intensity and execution on its next projects".

Peel Hunt's analysts estimate the market is currently pricing a rising copper price into Antofagasta's shares, with the share price at present reflecting a $6,050 per ton.

"Holding spot copper flat over time sees our unrisked DCF fall to 17p – essentially stating there is no value for investors if present prices, costs and exchange rates persist."

Analysts believe investors are increasingly focused on cost and capital discipline. Anto's management seem focused on only growing cash flows and hence potential dividend payments.

"We think management now needs to demonstrate sustained capital discipline plus good project execution to regain investors' trust," Peel Hunt said, with even a halving of the capex budget still requiring long-range copper prices to hit $6,600/t to earn a 10% post tax cash return.

"As a result we think investors need to take a more bullish view of copper than current market consensus and be willing to accept cost of capital like returns on new investments to be continuing to add to ANTO positions at present."