Broker snap: Antofagasta shares too expensive, says Morgan Stanley

19th Aug 2013 09:36

Morgan Stanley has maintained its 'underweight' position on Chile-focused copper mining group Antofagasta, saying that while current operating momentum is positive it will be difficult to keep up."Q1 and Q2 operating performance was undoubtedly robust with grades and recoveries (i.e. volumes) of copper and by-products exceeding market and our expectations," the US bank said."Yet, mined grades exceeded reserve grades by 19-87% for copper and gold while inflation is still high, so we argue that maintaining current run-rates in the face of mean-reversion headwinds could be difficult to sustain thus raising risk of disappointment."Morgan Stanley said that an unfavourable capital allocation over the next three to five years is still key to its negative stance on the stock. In spite of higher volumes, low prices and high inflation are set to reduce operating cash-flow from $5.2bn in 2010-2012 to $4.7bn in 2013-2015, according to its estimates.Meanwhile, the bank said that near-term growth at Antofagasta is "unexciting". For example, the Antucoya project is predicted to create just $130m in equity value compared with a total budget of $1.9bn. "The project's capital requirements will distort Anto's capital allocation and necessitate an increase in leverage to fund minimum dividend payouts, we believe."Furthermore, while long-term growth is accretive, capital investments of around $16bn exceed the company's market cap, "thus adding to risk in the even of cost overruns and delays".The shares are trading at 18 times 2015 earnings estimates, well above its historical forward price-to-earning multiple of 12.The stock was down 1.07% at 926.5p by 09:52 on Monday.BC