Amerigo Resources (TSX: ARG) (OTCQX: ARREF) announced Q3 financial results that largely met expectations. The company maintained flat production levels from a year ago and with strong cost control, held operating costs to only a 1.4% increase year over year when excluding molybdenum by-product credits.
Given the company signed a new 3-year agreement with its 198-member union, a very positive development, investors have much better visibility on operational efficiency and future operating costs.
Increase in Costs Largely Due to Lower Molybdenum Credits
Most importantly Amerigo still generated positive cashflow before working capital with copper prices down 17% year over year. With Copper prices trending flat in Q4, cashflow could potentially improve due to a lack of fair value adjustments next quarter.
For reference, Amerigo is paid for copper based on prices 3 months after the copper is delivered. Revenue is based on expected copper prices with an adjustment to revenue for the actual price Amerigo ultimately receives.
Amerigo’s peer leading 11.3% dividend yield is significantly higher than both the S&P/TSX Index (3.3%) and the S&P/TSX Dividend Aristocrats Index (3.8%). The safety of the dividend remains rock solid, as the company is generating positive free cashflow even in the current low copper price environment. A strong balance sheet just ads to the dividend support with cash exceeding debt by 1.5 times.
Copper fundamentals look very strong over the rest of the decade driven by the electrification of transport and the rise of battery storage. Copper is contending with a slowing growth environment in the short term, but medium and long term look exceptionally bright.
With variable buybacks keeping the yield at 10% even when the company’s stock was at $1.50/sh, double today’s price, Amerigo provides one of the best mixes of income support and cashflow sensitivity to higher copper prices we’ve come across. This stock is worth a deeper look for anyone upping their exposure to copper.
Operational Review
Quarterly results included a net loss of $4.4 million, compared to Q3-2021 (net income of $8.4 million). Loss per share (LPS) during the quarter was $0.03 [Q3:2021 earnings per share (EPS) of $0.05] and EBITDA of $1.6 million.
In Q3-2022 market copper prices continued to fall. This affected Amerigo’s performance through quarterly revenue which is marked-to-market at a lower provisional price (Q3-2022: $3.50/ lb) compared to Q3 2021 ($4.23/lb).
Amerigo’s quarterly financial results were impacted by $8.6 million in negative final price settlement adjustments to prior-quarter copper production. In Q3 2021 there were $2.4 million in negative adjustments to Q2-2021 production.
Production Summary
Copper production in Q3-2002 was 16 million pounds and copper deliveries were 16.2 million pounds, matching results from the same period last year (Q3-2021: production – 16 million pounds; deliveries – 16.2 million pounds).
Production includes 8.6 million pounds from fresh tailings (Q3-2021: 8.6 million pounds) and 7.4 million pounds from Cauquenes (Q3-2021: 7.4 million pounds). Production from fresh tailings in Q3 and Q2-2022 accounted for 54% of total production. Copper production from Cauquenes in Q3-2022 mirrored results from Q3-2021 (7.37 million pounds).
MVC’s average plant availability during Q3-2022 was 98.5%. MVC’s water reserves are sufficient to maintain projected Cauquenes processing rates for a least eighteen months, the maximum forecast horizon. ON September 30, 2022 water reserves were 5.4 million cubic metres, 0.2 million higher than at the end of Q2-2022.
Molybdenum production in Q3-2022 was 0.3 million pounds (Q3-2021: 0.3 million pounds).
The Impact of Copper Prices: A Background
As of September 30, 2022, the provisional copper price used by MVC was $3.50/lb. Financial performance is very sensitive to changes in copper prices. For example, a 10% increase or decrease from the $3.50/lb provisional price used on September 30, 2022, would result in a $5.7 million change in revenue in Q4-2022 in respect of Q3-2022 production.
In Q3-2022 revenue was positively impacted by an increase in copper delivered and copper sales volume during the quarter, and negatively impacted by a decrease in copper prices and negative settlement adjustments. Amerigo’s quarterly results in the most recent eight quarters were also affected by higher or lower cost of sales.
Quarterly Dividend
YTD-2022, Amerigo to shareholders were well rewarded with $24.3 million returned: $12 million were paid through Amerigo’s regular quarterly dividends of $0.03 per share, and $12.3 million were returned through the purchase of 9.4 million common shares for cancellation through a NCIB.
Financial Position
Amerigo made debt repayments of $3.5 million YTD-2002 (YTD-2021: $52.5 million). YTD-2022, the company made lease repayments of $0.7 million (YTD-2021: $0.9 million).
On September 30, 2022, the Company held cash and cash equivalents of $41.8 million (December 31, 2021: $59.8 million), restricted cash of $6.4 million (December 31, 2021: $4.2) and had working capital of $6.9 million (December 31, 2021: $24.6 million).
2022 Production and Cash Cost Outlook
Amerigo’s expects its annual production to be 63.8 M lbs of copper (3% over guidance) with cash cost trending towards $1.95/lb, approximately higher than guidance. This cash cost variance is attributable to lower than anticipated molybdenum production and byproduct credits. All other production costs remain aligned with Amerigo’s budget/guidance.
MVC had 2022 budget approval for two additional Capex projects:
1) the reinforcement of slurry and water lines between Cauquenes and the MVC concentrator plant ($2.2 million)
2) upgrades to the aerial tailings channel within the MVC facilities ($2.5 million)
The aerial tailing channel project was cancelled following additional studies conducted by MVC ($0.1 million) confirming the originally planned upgrades were not required. The project to reinforce water and slurry lines is projected to be completed on budget is behind schedule due to a delay in supplies. It is expected that $1.5 million of this project will be incurred in 2022 and $0.7 million will be incurred as part of the 2023 Capex budget.
MVC’s mining plan will require a new Cauquenes sump to be operational in Q3-2023. To prevent delays that could hinder production, from Cauquenes in 2023, MVC requested budget approval to initiate earthwork for the new sump in 2022. This approved, at an estimated Capex in 2022 of $1.1 million.
Conclusion
Amerigo has weathered the storm of supply chain constraints and a lowered copper pricing outlook over the past 2 years. Operational efficiency is a management priority – as the company makes strides to improve its cash position and continues to treat shareholders to one of the juiciest dividends in the entire mining industry, backed up by a solid cash position.
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