Why the City is warming to Antofagasta

London-listed pure copper play Antofagasta, with four mines in Chile, could benefit from disruption at First Quantum's mine, Panama Cobre, the focal point of country-wide anti mining protests that have rocked the government.It looks increasingly possible that the licence will be revoked, leading RBC Capital Markets to say "if the situation deteriorates further, it could remove our expected [global] copper market surplus for 2024."That's not the only reason RBC has upgraded Antofagasta's share price to ‘market perform' from ‘underperform.'China's demand is remaining more resilient "and indicators like premia and inventories could provide near-term price support". The end of the US Fed rate hike cycle could be another positive.There are also company-specific factors, ones that could underpin the stock after the shares fell last month on the company's lower than expected forecast for output in 2024.Not least is the proposed $3.7 billion expansion at the Centinela mine (the board is expected to decide by year-end) which would increase production by an average of 170 000 tonnes per year of copper-equivalent and move Centinela into the first cost quartile, according to brokers. Additionally, the proposed sale of water infrastructure could cut costs by $1 billion.Valued on the London market at £13 billion, Antofagasta's Chilean management has long been held in high regard, and supporters highlight how the shares have significantly outperformed the copper price over five years, up 60%, or double the price of copper at 30%.Chile's new mining royalty laws have been a worry for investors but Fitch has put out a note stating the changes "will not materially weaken the competitiveness of the country's copper mining sector [and] only modestly pressurise miners' cash flows".Citi said there are other tailwinds such as better water availability from the new desalination plant and a production ramp up at Los Pelambres.BMO said an expanded Centinela with first production forecast in 2027 meant the company was on track for "35% potential copper growth in the mid-term", which is impressive.ESG looks good and although droughts weigh heavily, Antofagasta's water reuse rate varies between 79% and 97%; it obtains almost all its energy from renewables.There are always concerns. Fitch said over the medium term, "we see notable risks to social stability, as Chile's politics are deeply polarised and the country grapples with simmering anger around inequality and stagnant living standards".Antofagasta's mines are located in drought-prone areas and the company has experienced water-related production disruptions in the past. But operational changes that the company can make to reduce water consumption include the use of desalination plants (as it has done at Los Pelambres) new technologies to reduce water intensity, and an increase in water recycling.UBS said: "In our view the medium-term outlook for copper is constructive and we expect the approval of the Centinela expansion project to drive medium-term growth."What the Antofagasta can't control is the copper price and forecasts are often prone to revision.Broker Jefferies said although bullish on the red metal in the longer term, "we believe the demand outlook related to the energy transition is becoming less compelling as renewable projects are being delayed and EV penetration in the US may be slower than previously believed."An October report from the International Copper Study Group poured cold water on the idea of a deficit looming in 2024. When the ICSG last met in April, it expected demand outside of China to rise by 1.6% this year after anaemic growth of just 0.4% in 2022. But forward six months and the prognosis [from ICSG] is much gloomier, reported Reuters. "Copper usage outside China is now expected to contract by 1% from last year's level, mainly impacted by declines in refined usage in EU countries and North America."Yes, Western demand weakness is being more than matched by strength in China (where apparent usage is forecast to grow by 4.3% this year). However, the copper market will transition from supply-demand balance in 2023 to a major supply surplus next year, according to ICSG, with City analysts flagging a more bearish outlook for the global economy.Production was forecast to exceed usage by 467,000t in 2024, a significant upward revision from the expected 297,000t surplus that ICSG had forecast in April.The group still thinks the market will be in deficit in 2023, but April's 114,000t shortfall has been cut to just 27,000t, in other words there's margin for error.The swing factor in the near-term could turn on developments at Panama Cobre, although it accounts for just 1% of global output, said Reuters.

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