RBC Capital downgrades Antofagasta to 'underperform'

Analysts at RBC Capital Markets lowered their target price on miner Antofagasta from 1,450.0p to 1,350.0p on Wednesday as it cut its rating on the stock from 'sector perform' to 'under perform', stating the risk/reward scenario was now "stretched".

RBC Capital said it had updated its estimates on the stock for cost inflation - moving ahead of guidance based on rising Chilean CPI, now at roughly 8% and set to further into higher energy and food costs, and higher oil price forecasts.

The Canadian bank stated copper-to-oil ratio, which saw a better margin environment for the miners in 2020 and 2021, has now unwound to long-run averages despite copper being near record levels.

"The accordion effect of the higher cost base from 2023 (assuming a c. ~5% inflation yoy then flattish) reduces our NAV estimates substantially (c. 35% and places our forecasts c. 16% behind consensus 2022 EBITDA). We continue to see potential that supply growth (and increasingly potential for weaker demand) could drive copper prices lower in the near-term. Our base case forecasts remain $4.25/lb for the balance of 2022 and $3.75/lb for 2023," said the analysts.

With inflation pushing margins down, RBC said Antofagasta looked set to flip back to cash flow negative in 2024 but added it still believes it to be "a well-run company".

"Mining stocks have rerated sharply into higher commodity prices, with ANTO no exception. However, working through increased cost estimates brings margins back to 2017-19 levels. With shares prices over 2x our long-term estimate of fair value we downgrade to 'underperform'."