Turkey of the week: tax-hit copper miner

published 18 June 2010

Political interference in the markets is a growing danger for investors just look at Australia's recent mining super-tax proposal. Nobody knows what other areas might be carved out for special treatment. But with so much debt to repay, many cash-strapped nations will surely be tempted to hike taxes on petrol, tobacco, alcohol and air travel.

So what about Antofagasta, a low-cost Chile-based copper producer? In the aftermath of February's earthquake, the Chilean senate has raised corporation tax and royalties levied on the industry to finance an $8.4bn reconstruction bill. This will cut the group's earnings by 5%-10% over the next two years and illustrates the vulnerability of the mining sector. Unlike many other industries, it's impossible to take a mine and up sticks to a low-tax jurisdiction. To compound this, Antofagasta's exposure to the geopolitical risks associated with South America should not be underestimated.

In addition, when the next air pocket in global GDP arrives (probably triggered by another sovereign debt crisis or the impact of all of Europe's austerity measures), the price of many base metals, such as copper, will be whacked. The bulls argue that Asian consumption has improved, but this won't be sufficient to sustain current prices, particularly as Chinese infrastructure spending cools and stimulus packages dry up.

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Over the past 18 months copper has more than doubled in value, partly fuelled by speculators and exchange-traded funds that have artificially inflated demand. But the hot money may soon vanish again: in May, Chinese imports of copper fell 9% from April, despite exports jumping 48%. Finally, Antofagasta's shares are just too volatile and expensive for my liking. Its market capitalisation has tripled from its October 2008 lows of 274p. Given the risks, I'd rate it on a through-cycle multiple of four-times Ebitda. After adjusting for the $1.9bn of cash, that delivers an intrinsic worth of around 770p a share.

Paul gained a degree in electrical engineering and went on to qualify as a chartered management accountant. He has extensive corporate finance and investment experience and is a member of the Securities Institute.

Over the past 16 years Paul has held top-level financial management and M&A roles for blue-chip companies such as O2, GKN and Unilever. He is now director of his own capital investment and consultancy firm, PMH Capital Limited.

Paul is an expert at analysing companies in new, fast-growing markets, and is an extremely shrewd stock-picker.