Amerigo Resources (TSX: ARG) (OTCQX: ARREF) remains our favorite way to invest in the multi-year upcycle emerging in the copper sector.
With a business model that is truly unique in the mining industry, coupled with a reliable operating history, Amerigo has mitigated the two most important risks that can kill stock returns of the average mining company in our view:
- Production disappointments
- Poorly timed growth investments
On the first, Amerigo beat production guidance in 2022 for the third year in a row, a rarity in the capital intensive world of copper mining.
The Amerigo team has demonstrated they are conservative and operational savvy, supporting a reliable and transparent payout strategy for investors.
Related to ill-timed growth investment’s, Amerigo is a high-yielding mature business with minimal capital needs. Management smartly built growth capacity in 2016 when copper prices were low and is now rightly choosing to spend only what is needed to maintain operational reliability and ensure future production is sustainable.
Amerigo is not going to blow excess cash on growth, but instead return it to shareholders during a copper bull market.
To Recap:
- ~$15 million dividend floor in 2023 above $3.80/lb copper (8% yield as of February 22nd)
- 6% increase in EBITDA for every 3% increase in copper prices
- Three years beating production guidance
- Could pay off the entire debt balance tomorrow with cash on hand
- Expected to end 2023 with Debt/EBITDA of only 0.4x.
Amerigo has the hallmarks of an underfollowed diamond in the rough, and we think investors will do well if all they do is simply buy the stock and clip the 8% coupon.
However, with demand for copper from the EV and renewable energy industries set to grow strongly, we think Amerigo’s total return has the potential to be far higher than 8%/yr and will be hard for any other mining company to match.
4Q and Full Year 2022 Operational Review
Amerigo showcased another year of stellar operational results. Production of 16.6 million pounds in the fourth quarter was up 4% over the prior quarter and essentially flat in the same quarter last year.
For the full year, production of 64 million pounds was 1% above 2021, and more importantly exceeded the company’s guidance at the beginning of the year by 3.4%.
Amerigo has demonstrated it is a first-class operator, after three straight years of exceeding production guidance.
Though inflation has led to rising operating costs, Amerigo was able to bring costs/lb down 4% from the 2022 peak in the second quarter, which is encouraging. The company expects cash costs will rise 10% in 2023.
2022 Annual Operational Review
Financials also ended 2022 on a high note with net income, excluding a one-off write-down of equipment coming in at $9.9 million, 11% higher than 4Q 2021 even though copper prices were higher in the prior-year quarter.
Cashflow before working capital was $35 million in 2022 compared to $69.5 million last year, due to lower copper prices in 2022. Importantly, Q4 cashflow of $15.6 million is on a much improved run rate compared to earlier in 2022.
Management’s guidance of ~$34 million of EBITDA at $3.60/lb copper supports the current regular $0.12/sh dividend by 1.5x times.
2023 Guidance is Likely Conservative
Amerigo released 2023 guidance in January, and expectations are being driven off of a copper price that so far is looking quite conservative vs year to date price levels.
Amerigo expects to generate ~$34 million of EBITDA at $3.60/lb copper. At the year-to-date copper price of $4.11, EBITDA would be $45 million based on management’s guided sensitivities.
With the dividend estimated to eat up only $15 million of cash, there is lots of room for investors to realize a return higher than the currently implied 8% dividend yield.
If Amerigo were to maintain the same payout ratio as in 2022 (58% of EBITDA), the stock will yield 14% in 2023 at $4.11/lb copper.
Most importantly, the dividend is well supported at price levels well below where we are today, giving investors confidence in an 8% yield, even if the stock price goes nowhere. Management has commented in the past that the dividend is secure at copper prices of $3.80/lb or above in 2023.
We applaud management for continuing to provide conservative guidance, even in the face of a strongly supported supply and demand outlook.
Amerigo EBITDA Sensitivities
Deleveraging is Complete, Prepare for Payouts
Amerigo is in the middle of the cash harvesting period of its investment cycle, with debt down to $23.7 million from $70 million in 2016.
With cash exceeding debt and interest coverage expected to exceed debt costs by more than 33x in 2023, the balance sheet couldn’t be stronger.
Historical expansions were well-telegraphed to investors, and the prior expansion of the Cauquenes tailings processing plant came in under budget.
Low production costs, low capex needs, and a strong balance sheet give us confidence in future investor payouts.
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