Investec maintains sell on Antofagasta due to uncertain Chinese demand

23rd May 2014 12:12

Things are looking down for Chile-focused miner Antofagasta, Investec says, due mainly to the strength in sterling, an expected increase in the tax rate and the uncertain near-term outlook for the price of copper. The effective tax rate is seen rising to 35% from fiscal year 2017 in comparison to 29% beforehand. In particular, the full 35% rate is expected to be applied to overseas cash returns. As a result the broker has cut its price target for the stock to 690p (from 715p). In parallel, the investment in capacity of recent years will probably see moderate oversupply over the next year or two, which may further undermine prices. To that one must add the near-term uncertainty about Chinese demand. Hence Investec´s decision to maintain its 'sell' recommendation.In fact, at spot copper prices their price target would drop to 643p and fiscal year 2014 earnings per share (EPS) to 76 cents. Nevertheless, a tighter market and price rises are seen post 2016. Furthermore, the present government in Chile is less mining friendly than the previous one. Lastly, companies in the sector face increasing challenges in the form of power and water constraints. These require investing in non-mining services so as to guarantee that operations can continue. "We view this as a hidden cost of operating in the country."The broker´s price target is based on a 50:50 mix of net present value (NPV) and a fiscal year 2015 eearnings per share multiple of 15.AB