Rising Costs And Chilean Risks Will Erode Copper Margins

Key Takeaways

• Rising costs and heightened regulatory pressures will likely squeeze margins and challenge Antofagasta's ability to maintain profitability.
  
• Reliance on Chile and uncertainties around copper demand, climate risks, and project execution threaten future production stability and revenue growth.
  
• Advancing expansion projects, technological innovation, and cost control are strengthening operational flexibility, production outlook, and long-term profitability while enhancing shareholder value sustainability.

Catalysts

Operates as a mining company.

• Despite strong recent financial results, Antofagasta faces rising capital and operational costs driven by intensifying requirements for decarbonization, compliance, and higher ESG standards, which are likely to pressure net margins well into the future.
  
• Long-term copper demand growth is at risk of moderation as technological advancements, substitution by other materials, and accelerated adoption of greener energy systems could curb global copper consumption, threatening future revenue growth.
  
• Persistent water scarcity and climate change in northern Chile, where Antofagasta's key operations are concentrated, are expected to increase water costs and disrupt production, putting downward pressure on production volumes and raising operating expenses.
  
• The heavy reliance on Chile exposes the company to escalating sovereign risk, including increased uncertainty around mining royalties, taxation, and permitting, which could negatively impact net earnings and constrain free cash flow over the long term.
  
• Project execution risks remain elevated, with potential for cost overruns, delays, or technological underperformance-particularly at Los Pelambres, Centinela, and the planned Cuprochlor deployment-threatening the company's ability to meet its ambitious production targets and thus affecting both revenue growth and earnings stability.

Antofagasta Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Antofagasta compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Antofagasta's revenue will grow by 3.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 14.6% today to 10.4% in 3 years time.
• The bearish analysts expect earnings to reach $857.1 million (and earnings per share of $0.83) by about August 2028, down from $1.1 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 26.5x on those 2028 earnings, up from 26.0x today. This future PE is greater than the current PE for the GB Metals and Mining industry at 10.1x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.99%, as per the Simply Wall St company report.

Antofagasta Future Earnings Per Share Growth

Risks

• Accelerating project delivery and progress on expansions at Centinela and Pelambres are on track to increase production volumes by approximately 30 percent in the coming years, which could drive long-term revenue and earnings growth well above current levels.
  
• The development and successful industrial-scale testing of new technologies such as Cuprochlor for copper recovery at Zaldívar may extend mine life and enhance recoveries from primary ore, potentially supporting both future production volumes and net margins.
  
• Antofagasta's ability to pursue more capital-light water supply solutions at Zaldívar, along with renewed permits securing operation through 2051, reduces operational risk and capital expenditures, supporting long-term free cash flow and profitability.
  
• The company's demonstrated ability to control costs and maximize production, coupled with operational synergies from collaborations-particularly with nearby mines like Escondida-could further support resilient EBITDA margins and competitive positioning.
  
• Strong current financial performance, with revenues up 29 percent and EBITDA margin improvement to 58.8 percent, indicates robust operational momentum and the potential for continued dividend payments, enhancing the sustainability of shareholder returns.

Valuation

• The assumed bearish price target for Antofagasta is £13.5, which represents two standard deviations below the consensus price target of £20.15. This valuation is based on what can be assumed as the expectations of Antofagasta's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £24.97, and the most bearish reporting a price target of just £12.86.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $8.3 billion, earnings will come to $857.1 million, and it would be trading on a PE ratio of 26.5x, assuming you use a discount rate of 8.0%.
  
• Given the current share price of £21.22, the bearish analyst price target of £13.5 is 57.2% lower.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.