Antofagasta PLC
LSE:ANTO
Earnings Call Analysis
Q2-2023 Analysis
Antofagasta PLC
Antofagasta Plc, under the leadership of CEO Ivan Arriagada, has demonstrated a commitment to sustainable development and responsible mining, with a clear purpose of developing mining for a better future. With safety as a non-negotiable priority, the company continues its operations without any fatal accidents. In the financial realm, Antofagasta reported a substantial 14% increase in revenues despite a 3% dip in realized copper prices, showcasing strong EBITDA margins of 46%, consistent with the previous year, and highlighted a solid balance sheet with net debt at just 0.27 times EBITDA.
The desalination plant at Los Pelambres has entered the commissioning phase, with expectations to incrementally increase copper production. Rising byproduct prices counterbalance costs, thus maintaining the net cash cost guidance with unchanged CapEx guidance. Antofagasta remains assertive about copper's critical role in global decarbonization and is implementing significant initiatives such as the near-completion of a desalination plant, which upon completion will substantially reduce the reliance on continental water. The company has reduced emissions by 37% since 2020 and is pushing for modern technologies like electric vehicles to further reduce carbon footprint.
With an investment surpassing $1 billion in their assets and delivering a dividend of $0.117 per share, Antofagasta balances shareholder returns with a strong capital allocation framework. However, Zaldivar did not contribute to the dividends in the first half of the present year.
Antofagasta's adherence to the global industry standard on Tailings Management has been ahead of schedule, which underscores its focus on safety and environmental stewardship. The company's 'Suppliers for a Better Future' initiative has already awarded $165 million of contracts, signifying a drive toward community improvement and sustainable practices.
Antofagasta's robust pipeline of growth projects, such as Centinela's second concentrator, shows a trajectory toward reaching an annual copper output of 900,000 tonnes. The phase 1 expansion of Los Pelambres is critical to this growth and is strategically designed to leverage natural resources like seawater, potentially doubling the plant capacity to 800 liters per second.
You don't have any saved screeners yet
Hello. I am Ivan Arriagada, Chief Executive of Antofagasta. Today, we published our financial results for the first half of 2023, and so together with our CFO, Mauricio Ortiz, and our VP of Sustainability and Corporate Affairs, Rene Aguilar were going to present the results. I will begin with a brief overview of our performance, before handing over to Mauricio and Rene, who will provide more detail on our financial results and our recent progress in sustainability.
Here we have the usual cautionary statement, which I encourage you to read as it is important. Our presentation today will cover the four main areas shown here. Before we begin, I would like to remind you of Antofagasta's purpose, developing mining for a better future. Through this purpose, we put sustainability at the heart of our business. We aim to mine and produce copper in a socially and environmentally responsible manner with a positive contribution to all of our stakeholders.
Here we can see a good example of our purpose in action. In the first half of this year, we opened a remote operating center for Los Pelambres. Through remote operations we see benefits in safety by removing people from risk environments.
Safety remains our priority, and I'm pleased to report that we had another period of positive safety performance. We continue to operate with no fatal accidents and safety indicators remain at historically low levels. However, we're not complacent. And later Rene will talk you through some of our initiatives that continue to help embed a safety-first culture across our business.
On financial performance, revenues rose by 14%. Despite a 3% decline in the realized copper price. Our EBITDA margins remain resilient, with a margin of 46% in the first half, which is in line year-on-year. We have long maintained a strong balance sheet with low gearing. As of 30th June, we had net debt of 0.27 times EBITDA.
With a construction phase of the desalination plantar of Los Pelambres behind us. We have now entered the commissioning phase. In June, the plant supplied an average of 160 liters per second, and in July it supplies close to 200 liters per second. With a gradual ramp up of this project in the second half of the year, we expect to see incremental increases in copper production quarter-on-quarter.
With this new production guidance, we have adjusted guidance for costs before by-products, but with stronger byproduct prices we have maintained our net cash cost guidance. CapEx guidance remains unchanged and we will continue to review the timing of capital expenditures. Projects that could be brought forward include Centinela mine development and the replacement of the concentrate pipeline at Los Pelambres.
Moving now to the legislative environment in Chile. On the mining royalty Chile’s Senate and Lower House both approved the revised royalty bill in May this year. This bill received presidential approval earlier this month and will go into effect from January, 2024. The new royalty will apply to Los Pelambres and Zaldivar from that date. Although we have tax stability agreements in place at Centinela and at Antucoya.
And the process to reform Chile's constitution, the members of the council to draft the Constitution have now been elected and we look forward to the next draft being made public in the fourth quarter, followed by a referendum on 17th December. The political uncertainty we have seen in Chile in recent years has impacted levels of investment at a time of heightened interest in the metals that Chile produces. We look forward to the conclusion of these two events so that Chile can be given the opportunity to grow the production of critical metals, benefiting not just itself, but also the world to achieve its decarbonization targets.
Looking now at the copper market, we believe that copper is the metal of the future. It is essential for the world's decarbonization efforts and switching to green electricity. In the near-term, we see uncertainty in China's economic outlook and growth targets, but expect the Chinese government to announce further stimulus measures. We are a long-term business, however, and the long-term outlook for copper supply and demand fundamental is supportive of a strategy for growing our business.
On the demand side, we see demand growing significantly from the current 25 million tons by 2035, driven by China, the U.S., and Europe. As these economies switch to electric vehicles and clean sources of electricity. On the supply side, we see copper mines across the world continue to experience technical challenges in the form of great decline, longer hold distances, and harder ore types.
However, we are starting to see an emerging trend with governments and regulators expressing an intent to review and expedite permitting processes for energy transition metals, which in the past has seen approval in many cases exceed a decade. It is getting harder to find and develop new mines, and we are seeing many existing mines revising their production focus downwards. All this is happening against a backdrop of rising demand.
At Antofagasta, we have a growing mineral resource base and the ability to unlock the value of these stunts, and we are well-positioned to continue to grow, especially with our organic resource base.
And with that, I hand over to our Chief Financial Officer, Mauricio Ortiz, who will cover our financial performance in more detail.
Thank you, Ivan. And welcome to everyone joining us today. My name is Mauricio Ortiz, and I will take you through our half-year financial results. But before we step in into the numbers, I want to drive your attention to this picture of our new desalinization plan at Los Pales. This investment is an example of how our capital allocation framework is working, optimizing the value of our mineral resources and unlocking its potential and be it climate resilience at the time we maintain a strong financial position.
This is how we create sustainable value and shareholders return over the long-term, which is fundamental in our purpose of developing mining for a better future. In the first half of the year, we saw revenue increase by 14%, despite a 3% decrease in realized cover prices. This growth was driven by increasing production, particularly at Los Pelambres, which saw at 24% increase in throughput rates. With increasing copper and by-products production and rigorous cost control, we reduced our net cash costs by 4% reflecting the increase in production at Los Pelambres.
We have a strong margin business through our high-quality assets. In the first half, our EBITDA margin was 46%, which enabled us to deliver value to all our stakeholders. Our balance sheet remained strong with a net debt to EBITDA ratio of 0.27 times in line with our year-end figure.
Finally, we announced an $11.07 dividend per share, which reflects a 35% pay ratio of net return for the first half and in line with our dividend policy. Underpinning our financial performance are our assets, which are summarized here. We publish our production report in mid-July, so I won't to go into much detail here, but in summary, production at Los Pelambres rose by 31% in the first half, mainly driven by increased water availability and therefore throughput net cash costs improve accordingly.
At Centinela, production was in line on year-on-year basis with net cash costs reflecting the settlement of a three-year labor agreement during the period amounting to our enough cost of $0.09 per pound. Production at Antucoya and Zaldivar, remained broadly in line, year-on-year, and our transport division carried a similar tonnage of material.
Moving to a more detailed view on production and cost. Here we can see the impact of the higher throughput at Los Pelambres, which was the primary factor contributing to our production growth. On cash cost external factors contribute towards an increase of $0.16 per pound, which mostly relates to a strengthening of the Chilean peso. In terms of controllable cost, a range of factors combined to contribute a $0.05 per pound saving, delivering after credit cash cost of $2.48 per pound.
I would like to mention our cost and competitiveness program, which generates savings and productivity improvements of $60 million in the first half of 2023, equivalent to $0.09 per pound of unit cash cost. This result has been achieved through a range of projects at all our operations, including improvements such as optimizing the water use at Los Pelambres or the haulage routes at Centinela along with contract management and procurement initiatives.
Turning to the by-product credits, these contributed an additional $0.18 per pound, mainly due to higher moly and gold pricing in Q1 2023. This allows us to counter the external inflationary pressures and to demonstrate. Once again, the robustness of our product portfolio, especially at Los Pelambres and Centinela Concentrates.
Moving to EBITDA, we can see the impact of increased production and sales volume mainly at Los Pelambres. Mining costs rose during the period, which relates to higher mining volumes related to the increase in production. In addition to the appreciation of the Chilean peso and local inflation. The contribution from associates and joint venture fell by $61 million reflecting lower production and higher costs at Zaldivar. Overall, we finished this first half with an EBITDA 8% higher than last year, maintaining our profitability with an EBITDA margin of 46%.
And now looking at our balance sheet, we see how metrics remain strong with a net debt to EBITDA ratio of 0.27 times in line with our year-end figure. From left to right, we see the strong EBITDA from our subsidiaries and the working capital moving flat over the half. Our tax payment in the first half of 2023 was $323 million, with almost 100% of this being paid in Chile. For more information on our tax, please see our second tax report, which is a standalone report on our wider economic contribution.
Next, we see our investment in our own assets amounting to just over $1 billion over the period. This is an increase of approximately $200 million compared to last year, which reflects higher sustaining CapEx at Los Pelambres and Centinela including mine development costs offset by lower growth CapEx as the phase 1 expansion at Los Pelambres ends.
Other factors shown here include the payment of the company’s final dividend for 2022 amounting $0.505 per share. In addition to the receipt of the proceeds following the company’s, exit from the Reko Diq project in Pakistan.
Note that the dividends here are those spaced by Antofagasta PLC, as Zaldivar did not contribute dividends in the first half of this year. Finally, with a strong balance sheet benefiting from the Reko Diq proceeds, we are well positioned for our next investment cycle in growing our portfolio.
Before I close, I'm back to where we start this financial review. I would like to take you through our capital allocation framework, which is fundamental to all our financial decisions. Our capital allocation framework is underpinned by our high-quality asset base, which has consistently demonstrate a strong cash flow generation. The interim dividend announced today, amounting $0.117 per share is the equivalent to 35% of net earnings, and this is consistent with the past five years as shown here.
Looking beyond our interim dividend and sustain capital, our approach to capital allocation is based on maintaining a strong balance sheet whilst also considering a range of macroeconomic factors and elements specific to our business decisions. Through a balance of growth and shareholders returns, we aim to deliver returns to all our stakeholders.
And with that, I hand you over to Rene who can provide an overview of our progress incorporates affairs and sustainability. Rene?
Thank you, Mauricio. My name is Rene Aguilar and I will now present a few slides on our sustainability footprint and how this is helping us to deliver our purpose of developing mining for a better future. To begin with safety, here on Slide 17, we can see the significant progress that we have achieved to date. Our approach to safety is based on monitoring both leading and lagging indicators. We have a particular focus on leading indicators such as high potential incidents as a key step in reducing lost time injuries and fatalities.
Recent work in 2023 has focused on risk identification and risk analysis, seeking to understand areas of our business with repeated safety incidents. We are also targeting areas of our business with higher incident rate for safety events such as the interaction of vehicles in our mining operations.
In 2023, we are installing collision avoidance systems in all of our haul trucks, which will further help reduce a key risk area in mining. Climate change in Chile is having a significant impact on people’s lives through the availability of water. The Board approved the construction of a desalination plant, and we are now about to take the first steps in a journey to substantially reduce Los Pelambres, reliance on continental water.
Through this investment, we have built a 400 liters per second desalination plant to supply Los Pelambres. This will improve water availability throughout the year. Once operational, it is our intention to commence construction to double the capacity of this plant to 800 liters per second. We have a lot happening in terms of water. At Zaldivar, we submitted an application that envisages investments to switch this operation to utilize royalty water in the same manner as Centinela and Antucoya or water from third parties. Following a necessary transition period involving an extension to the current permit, which expires in 2025 to 2028.
Through these projects, we expect the group to operate with a greatly reduced reliance on continental water sources. Aiming for 90% seawater or recirculated water use. Making us one of the most responsible carbon miners in Chile when it comes to water.
Moving across to Slide 19, we can see our emissions journey today. We are 37% reduction in emissions on a unit basis since our baseline year of 2020. A large part of this progress has been achieved through our adoption of green electricity contracts at all our operations in 2022, greatly reducing our Scope 2 emissions.
In the pie chart to the right, we can see our carbon footprint today is predominantly Scope 1 emissions. With 60% of this category being diesel, we are focusing our efforts to implement modern technologies to reduce consumption and improve efficiencies. Examples of such technologies include a trial trolley assist project at Los Pelambres, and June this year we started using a fleet of 50 electric light vehicles at Centinela.
Looking ahead, a key project for us is our work to determine the next phase of our emission reduction targets. Having met our previous target of a 30% reduction. We have worked on the measurement of our Scope 3 emissions. Understanding that this is an ongoing process and the industry continues to find, tune and define the methodology to be used in estimates. Based on this, we expect to make progress in defining targets that will allow us to manage this category of emissions throughout our value chain, including both upstream and downstream emissions.
Looking at tailings, we are at an important moment in terms of reporting around tailing facilities. The global industry standard on Tailings Management is an initiative co-created by the International Council of Mining and Metals, United Nations Environment Program, and Principles for Responsible Investment. We fully support this important initiative and we are pleased to report that the main tailings facility at Los Pelambres, known as El Mauro, as well as the tailings storage facility at Centinela have now met the requirements for disclosure and in this global standard.
The former is reported in line with the deadline set for meeting this requirement and in the case of Centinela, we are reporting two years ahead of schedule. For more information on our approach to tailing safety and management, please visit our website.
Looking at Slide 21, as good example of this interconnected nature of our sustainability program is our suppliers for a better future initiative through which we are engaging with our suppliers to improve competitiveness, sustainability reporting, and diversity, as well as health support local development. We consider that these activities are part of our broader license to operate, helping to improve the standards in local communities.
This project was launched in December 2022, and through this initiative, we have already awarded $165 million of contracts across 351 tender processes. And with that, I will now hand it back to Ivan to take us through the remainder of our presentation today.
Thank you, Rene. For the final segment of our presentation today I would like to update you on our growth program. Here on Slide 23, we have our pipeline of growth projects. These range from those which deliver growth in the next two to three years, through to in Encierro and Cachoro projects, which have added close to 1 billion tonnes to our resources recently.
In addition, we have Centinela second concentrator, which I will go into in more detail later in this section. Overall, this pipeline of growth demonstrates a potential pathway to grow to 900,000 tonnes of copper.
One area of growth where we are nearing completion is the phase 1 expansion of Los Pelambres, which comprises of a 400 liter-per-second desalination plant and a fourth concentrator line. As announced previously both projects are now in the respective commissioning phases. Completion for this phase of growth is expected to be achieved in the second half of the year.
The implementation of both will reduce variability in throughput Los Pelambres, and assist with water availability. Once completed, as Rene mentioned previously, we expect to commence construction to double the capacity of the desalination plant to 800 liters per second. This will enable us to achieve our target of 90% of our water consumption across the group to be either sea water or recirculated water. This was a consideration in the construction of the existing plant and the space has already been assigned for the necessary equipment for this expansion.
Moving to the north of Chile, we have a significant growth project at Centinela. With our reserve base of nearly 2 billion tonnes of copper ore, we have the opportunity to significantly expand production at this operation to the addition of a second concentrator. The map here shows the proposed configuration of our mining operations with the current concentrators fed by ore from Esperanza Sur both of which are in operation today.
The proposed second concentrator will also be fed by the Esperanza Sur pit as well as the Encuentro pit. Fully exposing Esperanza ore to feed the second concentrator will require mine development activities that are expected to commence halfway through the construction phase of the second concentrator.
This will require investments in infrastructure, mining equipment, and mine development activities spread across a period of three to four years. If we decide to advance the second concentrator, this is a project that would add approximately 170,000 tonnes of copper equivalent production, helping us to get to the 900,000 tonnes mentioned previously.
This brings us to the end of our presentation today. Shown here is our purpose of developing mining for a better future and how we are delivering on this purpose. Speaking here today we are at an important moment. We're entering a growth phase. The Phase 1 expansion at Los Pelambres is now in its commissioning phase, and we will soon be considering updated studies on the Centinela second concentrator to grow our production to 900,000 tonnes of copper.
We're operating sustainably. Our safety metrics are at a record level. Our emissions footprint has fallen by 37% and we are proud to be working closely with local communities and local suppliers. Finally, we're seeing strong fundamental value in copper in the medium term with a positive outlook for prices supporting our growth ambitions.
And with that, I'll bring the presentation section of this session to a close. Thank you for your attention.