Investing.com -- RBC (TSX:RY) Capital Markets has downgraded both Anglo American (JO:AGLJ) plc and Antofagasta (LON:ANTO) plc to "underperform," citing valuation concerns, rising financial pressures, and challenges in key projects against a backdrop of heightened market risks.
The downgrades reflect skepticism about the near-term outlook for the two mining giants as they navigate high capital expenditure, commodity price volatility, and unresolved structural issues.
Anglo American has been a standout performer, gaining 24% in 2024 while peers fell by an average of 20%. Much of this outperformance was driven by its restructuring progress and a failed takeover attempt by BHP, which elevated its stock price.
However, RBC analysts now believe that Anglo’s valuation is stretched, with shares trading at the level of BHP’s final offer.
A renewed bid appears unlikely, as analysts estimate that justifying a 20% premium to the current price would require copper prices to rise to $4.86/lb—well above the $4.50/lb threshold at which BHP generates acceptable returns from its own copper projects.
Antofagasta has similarly benefitted from bullish sentiment around copper, with prices on the COMEX rising 7% year-to-date.
However, RBC attributes this rally to speculative inventory hoarding in anticipation of potential U.S. trade tariffs, particularly those tied to Trump-era policies.
With COMEX prices trading at a 4.2% premium to LME prices, analysts expect the gap to close, potentially leading to a sharp pullback.
Antofagasta’s shares, which tend to track COMEX prices more closely than LME prices despite revenue being tied to the latter, are particularly vulnerable to this reversal.
Both companies face mounting challenges with key projects that could weigh on their financial performance and share prices.
Anglo American continues to struggle with its diamond business, De Beers, which has seen prices decline by approximately 15% since May 2024.
Management’s plans to divest or spin off De Beers by the end of 2025 now appear unlikely, with negotiations over a critical marketing agreement with Botswana still unresolved.
De Beers represents a relatively small portion of Anglo’s overall portfolio but demands 11% of its capital expenditure. This makes it a cash drain and a potential deterrent to future acquirers.
At the same time, Anglo’s Woodsmith polyhalite fertilizer project remains a source of uncertainty.
Despite its potential, the project has struggled to attract external investment, and analysts believe Anglo may have to move forward alone or sell a stake at a discount to its $2.9 billion consensus valuation. Either scenario would likely weigh on the company’s stock performance.
Antofagasta faces its own challenges as it hits peak spending for its Centinela second concentrator project.
Capital expenditures are expected to rise to $3.5–3.9 billion in 2025, up from $2.7 billion in 2024, as the company works toward its medium-term goal of producing 900,000 tonnes of copper annually.
However, analysts warn that this heavy investment comes at a precarious time. With copper demand potentially softening as buyers front-load purchases to avoid potential tariffs, the market risks a demand gap later in the year.
Both companies face rising leverage and declining shareholder returns. For Anglo, unresolved issues with its key projects could limit cash flow, while Antofagasta’s net debt-to-EBITDA is expected to rise from 0.5x in 2024 to 0.8x in 2025, based on RBC’s forecast of $4/lb copper prices.
Dividend yields for Antofagasta are also expected to drop from 1.6% to 1.3%, potentially reducing its attractiveness to investors.
While equity markets remain optimistic about copper’s long-term role in the energy transition, RBC analysts see limited upside for either company in the near term.
Anglo’s recent performance is viewed as overdone, and Antofagasta’s exposure to speculative price moves on the COMEX could further pressure its shares.
RBC has cut its price target for Anglo American to 2200p from 2400p, while Antofagasta’s price target remains at 1600p.
With mounting financial and operational pressures, RBC analysts suggest that investors approach Anglo American and Antofagasta with caution, as both companies appear poised to face significant near-term headwinds.