Antofagasta benefits from rivals’ pullback

Antofagasta has said that rampant cost inflation, which has dented the industry’s profitability, is starting to abate as big miners pull back on investment projects.

“It is difficult to quantify,” said Diego Hernandez, Antofagasta’s chief executive who joined the London-listed copper miner last month after leaving Codelco, the Chilean state-owned copper company in May. “We have started to see more availability of services and equipment …because projects have been discontinued or delayed.”

An easing of competition for equipment, services and skilled labour would be a boon for the mining industry, which has been struggling as falling prices for key commodities such as copper, iron ore and coal depress revenues, while rising costs eat into earnings.

Miners including BHP Billiton, Xstrata and Anglo American have in recent weeks said they will push back investment spending or review their plans for new developments, as the outlook for commodities prices becomes more uncertain.

Antofagasta’s first half pre-tax profit fell 7.6 per cent to $1.6bn, a smaller drop than many of its bigger peers, as production increased from its key Esperanza growth project.

But the Chilean company, which is majority owned by the country’s Luksic family, said it would need to spend another $200m-$250m over the next two years at Esperanza, addressing problems with tailings thickening and with grinding at the mine.

Esperanza – a key plank of the miner’s ambition to increase output – has had teething problems during its ramp up. Antofagasta said it expected production from the mine to be at the lower end of its target range, but kept its overall forecast for 700,000 tonnes of copper this year.

The miner’s cash costs, net of sales of by-products such as gold, fell 6.3 per cent to 98.9 cents a pound. But Antofagasta wanted its net costs for the year slightly higher than expected as gold prices fall.

Analysts at Liberum said they expected the issues at Esperanza to continue into next year, hitting production and costs, and warning that the copper miner’s shares, which have tended to trade at a premium to the sector, could suffer.

Antofagasta shares fell 0.8 per cent on Wednesday to £11.23.

Mr Hernandez said the miner expected demand for copper to remain robust, although uncertainty about the strength of the world economy could cause price volatility.

Cancellations or delays of mine developments around the industry could help keep the supply and demand of copper balanced in the medium term, he added. “Announcements of project delays will improve the picture from 2014 onwards,” he said.

The price of copper has fallen by about 16 per cent over the past year and is down about 10 per cent since April at $3.45 a pound. Antofagasta said copper price had found “good support” at $3.30-$3.40 a pound.

Antofagasta’s revenues rose 3.5 per cent in the first half of the year to $3.2bn, while earnings per share fell 7.2 per cent to 65.5 cents. The miner announced a 6.3 per cent increase in its dividend to 8.5 cents a share.