Investment Column: Hold on to resilient miner Antofagasta

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The Independent Online


Our view: Hold

Share price: 1005p (+11p)

Copper miners in Chile have had more than their fair share of column inches in recent weeks thanks to the devastating earthquake that hit the country a fortnight ago.

Despite the tremor reaching a staggering 8.8 on the Richter scale and the loss of about 1,000 lives, investors in Antofagasta, the country's biggest copper producer, barely blinked, and the stock has continued to climb unchecked. The shares nearly doubled in the last year, and the group was keen to stress yesterday that the earthquake caused only a temporary stoppage at its flagship Los Pelambres mine. It is not expected to have any material effect on operations.

Antofagasta said that investment in its mines this year would lead to a 23 per cent jump in production, after depressed prices and a fall in 2009 production led to a 21 per cent drop in core profits last year. And while investors should be encouraged by the uptick in production, now forecast to hit 543,000 tonnes in 2010, there should be concerns about the dividend. Antofagasta said that payouts would total 23.4 cents a share, which includes a special dividend. However, the total return is down from 60c from 2008, which included a payout from an exceptional gain. The total ordinary dividend increased 4.4 per cent.

The analysts at Liberum Capital said the dividend payout is disappointing since the firm has a good cash balance and its main mine operation is self-sufficient. It could be that acquisitions are in the offing, and there is an argument that investors should sell in anticipation of what some feel will be a long-overdue "substantial correction" in the copper price.

We would be kinder. The shares trade on a pretty average 2010 price to earnings multiple of 15.6 times, and even though the dividend yield is an anaemic 0.6 per cent, investors have seen strong appreciation in the last 12 months. We would therefore hold for now.



Our view: Avoid

Share price: 195p (+5p)

Confidence in Gartmore is not high at the moment. The fund manager's flotation was a difficult one, and the shares have since fallen from the knockdown price at which they were sold to investors. Yesterday the group was putting a positive spin on its prospects, however. Gartmore took in more net money in the first three months (£273m) than for the whole of last year, when the figure was £252m.

Markets have recovered, and there appears to be more appetite among investors for equity-linked product than there once was, suggesting that that the company should be able to grow from here. Hedge funds have helped to drive business – they are one of the company's long suits, and the chief executive, Jeffrey Meyer, argues that Gartmore can still generate a good return for shareholders from them, despite their managers' expectations of lavish rewards.

Pre-tax profits were a respectable £46.2m against a £138.4m loss the previous year, and debt is down to about £85m. Paying it off remains the focus, and there is no dividend (nor will there be one this year). The shares are not expensive, sitting on a multiple of just 10 times this year's forecasts (the sector's on 13 times), although given the debt and lack of divvy, that is not undeserved. We remain a shade sceptical, however; the compensation ratio at 52 per cent looks high to us. It is going to come down, but we want to see Gartmore showing a record of making money for its investors rather than just staff and management before we'd wade in. So avoid for now.

Clipper Windpower

Our view: Speculative buy

Share price: 121.5p (+0.5p)

We're big supporters of green energy but that does not mean we'd put our money behind badly run companies. Loss-making Clipper has arguably been just that in recent times and has had to spend millions dealing with problems with the skin on the blades of its wind turbines which would otherwise not come close to lasting as long as they should have.

However, yesterday the chief executive, Doug Perta, quit, and was replaced by Mauricio Quintana, who was director of corporate strategy and development at United Technologies, the company's biggest shareholder, which is keen on windpower and may be prepared to invest more.

That's a point worth noting, and if he can set the company on a more stable path (it has interesting businesses in both the US and here), then things could look much better for the AIM-listed operation in a couple of years' time. Clipper remains a risky proposition, and its past is not an altogether happy one, so this is not one for cautious investors. But we make Clipper a speculative buy because we feel the shares can move on from here.