The Investment Column: Antofagasta looks a copper-bottomed bargain at this price

Wellington; Dicom Group
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The Independent Online

Our view: Buy

Share price: 442p (+9p)

Antofagasta shares featured as one of the top performers in the FTSE 100 yesterday and rightly so. The Chilean copper miner unveiled a 78 per cent jump in first-half profits, raised its production forecasts for this year and told its shareholders to expect a special interim dividend.

The copper price is key to Antofagasta's success. It has risen by 70 per cent so far this year, helped by the fact that the world's biggest copper mine, Escondida, owned by BHP Billiton, has been crippled by a strike which has significantly reduced supplies. The long-term trend behind the soaring value of copper is strong demand from China and India.

Although in the short term the copper price may fall back, especially if the dispute at Escondida is resolved, long-term fundamentals remain intact as the industrial revolution that has gripped both China and India shows no sign of abating. Analysts expect demand for copper to outstrip supply well into 2008 and possibly beyond.

Antofagasta now hopes to produce 455,000 tonnes this year, up from an earlier prediction of 440,000 tonnes, due to strong processing levels. The interim dividend it announced yesterday was 3.2 cents per share, in line with forecasts, but it surprised investors with news of a 2 cents special dividend. With more than $820m of cash on its balance sheet, it looks very likely that the group will pay another special dividend at the year-end stage.

Although Antofagasta shares have rise by 52 per cent over the past 12 months, they still trade at just six times forward earnings and yield 5.5 per cent. The stock is a bargain.


Our view: Hold

Share price: 94.25p (+0.25p)

A year can be an awfully long time in the insurance sector. When we last wrote about Wellington Underwriting - some 12 months ago - the company was boasting of better-than-expected profits after a low level of natural disasters and a resurgence in the equity markets. We advised shareholders to take profits.

Days later, Hurricane Katrina hit the US - the most costly natural disaster on record - exposing Wellington's lack of reinsurance cover and eventually sending it to a full-year loss.

After sacking its chief underwriting officer, the group has spent the past six months restructuring its business to ensure there can be no repeat of last year's events - even if another Katrina were to hit. And it has made some good progress.

With more reinsurance on board this year, and tighter risk estimates underpinning the business, the group is finally beginning to look on a more solid footing. Yesterday's announcement that it is to launch into the US marine insurance sector will also help to diversify the business - particularly important after the group's reduction of its stake in Bermudan reinsurer, Aspen.

Nevertheless, investors should be under no illusion. Wellington is a high-risk stock, and while it has benefited from the premium increases driven by last year's severe hurricane season, its prospects are still largely in the hands of the weather and equity market gods. After a rally in its share price in recent weeks, which has left it trading at more than seven times next year's earnings, we believe it is now fairly priced.

Dicom Group

Our view: Buy

Share price: 245p (+16.25p)

According to a study conducted by the University of California, more information was created between 1999 and mid 2002 than had ever been created in the period up to 1999. This leaves the modern corporation having to process and store record levels of information every year.

It is therefore little wonder that business is booming at Dicom. The group's software is designed to transfer information held in non-standard formats such as on paper into an electronic format that can be easily stored on a database and then searched. Yesterday, it posted forecast-busting full-year results after a particularly strong fourth quarter.

Pre-tax profits for the year to the end of June rose to £12m from £11.9m, while turnover jumped 16 per cent to £209m. Dicom is very cash generative. It enjoyed a £25m inflow last year, compared with £18.7m in 2005.

The figures showed the group experience its third successive quarter of sustained growth with the business firing on all cylinders across all three of the geographic areas it covers - Europe, Asia and the US. They also saw it boast of a number of new contract wins from the likes of Japan Telecom and Sun Chemical, the world's largest maker of printing inks.

Clearly momentum is building at Dicom. Give its strong product pipeline this trend should continue for a good while to come. And yet its shares trade at a sizeable discount to the wider sector. This alone makes them interesting. Add to that the possibility of Dicom being taken over - the industry is consolidating fast and the rival FileNet was recently bought by IBM - and the stock is a clear buy.