Amerigo: Cheap copper, plus yield (update)

by James Kwantes

Shares of TSX-listed Amerigo Resources (ARG) closed at 67 cents Wednesday, up 13.5% since I wrote up the copper producer as an investing idea on Nov. 7. The stock has been moving for the past week on high volume, so some funds may be jumping in to start the New Year.

Amerigo’s Chilean subsidiary, Minera Valle Central, processes copper and moly from the copper tailings of Codelco’s El Teniente mine, the largest underground copper mine in the world. El Teniente has been producing copper for 100 years, and has reserves that will last for decades. Amerigo is profitable, with the stock currently yielding 6%, and the company has laid the groundwork to ramp up cash flow.

I spoke to corporate secretary Michael Kuta on the phone Wednesday, and it sounds like Amerigo is unlikely to hike or increase the frequency of the semi-annual dividend in the coming year – a move that was on my wish list.

Instead, the growing cash pile – largely as a result of cheaper electricity contracts that take effect this month – will be put to work increasing the plant’s capacity to process material from other tailings ponds, he said. Negotiations with state-owned Codelco for the right to process the extra material are ongoing, but a deal is more a matter of when than if.

As Raymond Goldie, vice-president and senior mining analyst at Salman Partners, put it in an interview with BNN’s Mark Bunting on Jan. 7: “Amerigo Resources is one of those companies that could be taken over, and while you’re waiting for it to be taken over, you get a yield of 6 ½ percent.”

It’s much cheaper for a large copper consumer to secure supply on the TSX than on the London Metals Exchange, Goldie pointed out – $2 or $2.20/lb compared to $3.60/lb. The commodity bull has paused for breath, not collapsed, and copper looks well-supported by demand in developing countries, including … wait for it … China.

Here’s the link to the BNN interview:

http://video.ca.msn.com/watch/video/top-canadian-resource-stock-picks-01-07-13-4-35-pm/jvafce9w?from=sharepermalink&src=v5%253ashare%253asharepermalink%253a

Last year, Amerigo released Q4 and full-year production numbers on Jan. 27, and Q4 financials on March 5.

Disclosure: I own Amerigo Resources shares. Do your own due diligence and please read my disclaimer.

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