Amerigo Beats on Costs & Production While Generating a 9% Payout in Q1 2023

Amerigo Resources (TSX:ARG) reported another strong quarter, both operationally and financially. The company continues to be our favorite way to invest in copper prices given one of the highest dividend yields in the copper sector while also offering leverage to rising prices.

The fact that the company continues to trade at a shareholder payout yield (dividend + buyback) close to 10% with more cash than debt, tells us the stock remains largely unknown to the greater investment community. Investors in Amerigo are being paid handsomely to wait for the valuation gap to close so a catalyst isn’t necessarily required, however we believe the valuation disconnect will naturally close over time driven by two factors.

  1. Continuing stable production and cost control. Stable operations support the current free cashflow generation that more than covers best in class shareholder payouts.
  2. History of dividend payments. The longer Amerigo keeps paying such an attractive dividend, the more confidence investors will have in the sustainability of the dividend.

The company’s net cash position, 2.5x cashflow coverage of the dividend and guidance beating production already give us confidence the dividend payout will continue. We are happy to collect $0.10 annually per $1.00 invested while we wait for the rest of the market to discover this hidden gem.

1Q 2023 Highlights

  • Maintained stable production and cash costs year over year.
  • Copper production of 16.5 million pounds exceeded guidance by 4.5%
  • Cash costs in line with 1Q 2022 and 10% below management guidance
  • Returned $5.5 million to shareholders through dividends and buybacks (9% total shareholder yield) among the highest in the copper industry.
  • Generated a 14% annualized free cashflow yield at $4.00/lb copper
We are pleased to report strong financial results for the first quarter of 2023,” said Aurora Davidson, Amerigo’s President and CEO. “As previously announced, quarterly copper and molybdenum production exceeded guidance, and Amerigo’s cash cost was 11% lower than expected due to strong molybdenum byproduct credits.

1Q 2023 Financial Review

Amerigo reported essentially flat revenue compared to the same quarter in 2022 at $53 million even though copper prices were 14% lower than the same period last year. Higher byproduct credits from selling Molybdenum made up the difference.

Higher costs driven by consumables, electricity and labor inflation were offset by higher molybdenum credits leading to flat cash costs in Q1 2023, a strong result given COVID-driven global inflation.

If Molybdenum prices continue to hold above $16/lb, currently at ~$32/lb, there will be upside to managements free cashflow and EBITDA guidance in 2023. Amerigo generated $8.6 million of FCFE and $18.5 million of EBITDA in 1Q which was far above what the company provided sensitivity table below would estimate at $4.00/lb copper.

Amerigo EBITDA and Free Cashflow Sensitivity to Copper Prices

Source: Amerigo Investor Deck

Amerigo continued to generate excess cash in the quarter with the cash balance increasing to $44 million a $6 million increase quarter over quarter. Amerigo now is in a net cash position of $19.7 million, enough to cover the annual dividend from cash three times over.

Over our 20 years investing in and analyzing commodity markets, companies with pristine balance sheets and dividend yields close to 10% are very rarely seen and do not trade at such large yield premiums to the overall market for very long.

Capital Return Strategy

In Q1-2023, Amerigo returned $3.6 million to shareholders through the regular quarterly dividend of Cdn$0.03 per share, and $1.9 million was returned through the purchase of 1.6 million common shares for cancellation through Amerigo’s ongoing Normal Course Issuer Bid (“NCIB”). A further 9.5 million shares can be repurchased for cancellation under the NCIB before December 1, 2023.

Amerigo continued to repurchase shares in April and will likely continue buybacks after the expiration of the earnings quiet period on May 4th.

Shares Repurchased in 2023

Source: Amerigo Resources

Since the implementation of Amerigo’s Capital Return Strategy initiated in September 2021, they’ve paid a cumulative dividend of Cdn$0.17 per share ($22.2 million) and used $23.0 million to purchase and cancel 19.5 million of common shares, a 10.7% reduction in the number of shares outstanding since the strategy’s inception.

Last December Amerigo’s board authorized an additional 11.1 million share buyback program through December of 2023. As of March 31st, 9.5 million shares, 5.5% of shares outstanding, remain to be purchased. Based on Amerigo’s average daily volume of 212,000 shares, the buyback program would make up 16% of all shares trades from April 1st until December if it continues. This would represent a significant support mechanism for the stock and demonstrates how undervalued management believes the share price is.

In addition to quarterly dividends of Cdn$0.03 per share and the opportunistic repurchase of common shares for cancellation under the NCIB, Amerigo is confident that copper prices at $4.00/lb or higher will permit the deployment of performance dividends in 2023.

Amerigo Resources is a market awareness client of Capital 10X. For more information, including potential conflicts of interest please see our Content Disclaimer.


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