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Lately, I’ve been investing in dirt cheap FTSE 100 dividend payers, but what looks like an unmissable growth stock has just caught my eye. I think it could be the perfect way to play the next leg of the stock market recovery.
The stock is Chilean-focused copper and gold miner Antofagasta (LSE: ANTO), whose shares have sprung into life after a tough six months.
Copper is known as ‘Dr Copper’, because it gives economists a pretty accurate diagnosis of the global economy’s health. It has a host of industrial uses, including for electrical wiring, roofing, plumbing and industrial machinery, and demand rises when economies are booming, while supply is fairly inelastic. Lately, the good doctor has looked worried. With the world sweating over war, inflation and recession, the copper price has fallen and taken the Antofagasta share price with it.
Copper futures fell 6.68% over the last six months. Over the same period, Antofagasta shares are down 12.83%. The share price dip is a bit of a rarity. It’s still up an impressive 48.54% over one year and 63.29% over five.
Wednesday’s news that US inflation fell to just 3% in June put a rocket under the FTSE 100, and particularly Antofagasta. Its shares jumped a mighty 5.57% on the day, then another 2.08% on Thursday. The other big miners did well, but not as well as Antofagasta.
I’ve no idea how long the rally will last. There’s still an awful lot of bad news out there, with inflation remaining stubborn in the UK and Europe. Yet this week has shown us how quickly mining stocks can recover when investors are upbeat.
Antofagasta’s focus on copper gives it an edge, as the metal is essential if we are to hit net zero targets. Electric cars need three times more copper than traditional motors, while it’s also used in wind turbines, solar panels and other renewable energy sources.
There are risks, inevitably. revenues fell 22% to $5.9bn in 2022, as droughts hit production and copper prices fell 12%. This year, early hopes that the mining sector would benefit from China’s post-Covid reopening quickly faded.
It’s just a little expensive
China’s GDP grew by 2.2% in the first quarter of this year, only to slow sharply to 0.5% in Q2. The country consumes roughly half of the world’s copper, so that’s a big deal. But nobody should expect a return to the era of double-digit GDP growth.
Another reservation is that Antofagasta is more expensive than most of its rivals, trading at 24.4 times earnings for 2023. Yet with a low net debt-to-equity ratio of just 8%, it boasts a healthy balance sheet and is a solid, well-run company.
The forecast yield is relatively low for a miner at 2.7%, covered 1.7 times by earnings. However, management aims to pay all its profits as dividends, so each year’s yields can be variable. For example, investors got just 1.5% in 2019 but 7.9% in 2021.
If Dr Copper is correct and we’re heading for better days, I’d expect Antofagasta to give me a decent yield of top of any share price growth. I’ll buy it when I have cash in my trading account again. Hopefully, that will be before the stock market bounce.