Investing idea: Amerigo Resources

by James Kwantes

Codelco: not a bad business partner

UPDATE (Nov. 10): Amerigo reported a net loss of $4.2 million, due largely to a $4.6-million bonus payment related to a 4-yr labour deal and a one-time $2.5-million accounting charge. Revenue up from a year ago, as was copper & moly production. Cash flow of $2.7M. Power contract changes should result in $20M in savings annually for the next 5 years. Dividend of 2 cents is payable Nov. 29 for shareholders as of Nov. 19.

ORIGINAL (Nov. 7): Amerigo Resources (ARG) is a small-cap company in the mining sector, like many junior miners, but that’s where the similarities end.

Amerigo is profitable and pays a dividend. It could also be poised for further growth – both in the share price and dividend – if management can execute on expansion plans.

TSX-listed Amerigo – through its subsidiary Minera Valle Central (MVC) – processes tailings from Chile’s El Teniente, the world’s largest underground copper mine, and pulls out copper and molybdenum concentrates. MVC is currently processing fresh tailings from present production at the mine – owned by Chilean state-owned producer Codelco – but also has the right to process higher-grade material from a 200-tonne tailings lake near the plant. MVC was set up by former Codelco executives.

It’s not sexy work, but it’s profitable – how profitable, we won’t know until tomorrow (Nov. 8) at the market open when Amerigo releases Q3 financials. Third-quarter production was solid, according to an Oct. 16 news release: MVC produced 12.7 million pounds of copper and 321,788 pounds of moly during the quarter. Year-to-date copper production is 20% higher than 2011 and YTD molybdenum production is up 30% compared to 2011.

The company will also likely announce its semi-annual dividend tomorrow. Last year, the dividend was payable on Nov. 30 for shareholders of record as of Nov. 16. With an annual payout of 4 cents a share and the stock at 59 cents, Amerigo’s annual dividend yield is just shy of 7%.

Amerigo’s stock symbol aptly sums up the pain shareholders have experienced in recent years. Amerigo shares hit all-time highs above $3 in the spring of 2007, when the company was paying a 13-cent annual dividend. Enter the financial crisis: the stock sunk from the mid-$2 range at the beginning of 2008 to 30 cents and change by the end of that annus horribilis. Copper and molybdenum prices went off a cliff and the dividend was suspended in March 2009.

The stock has underperformed ever since as the company weathered cost inflation, a strike last year at El Teniente and other operational challenges. High power costs have cut into the bottom line, but a change in MVC’s power contract as of Jan. 1, 2013 should mean “substantial annual savings” over the next four years, according to the company. MVC also has in hand a four-year labour agreement with its unionized employees.

In addition, Amerigo has laid the groundwork for higher production with an expansion to production capacity in anticipation of obtaining the rights from Codelco to process material from other tailings ponds with higher copper and molybdenum grades, as outlined in a May 8 news release.

With 172 million outstanding shares, Amerigo’s market cap is just over $100 million. The company has healthy levels of insider ownership – CEO Klaus Zeitler owns more than 2.2% of outstanding shares, directly and indirectly, and the major shareholder is Vancouver mining magnate Ross Beaty, with a 17.4% stake (mostly through his investment company Kestrel Holdings). In June, Geologic Resource Partners LLC, a Boston-based hedge fund, took a 10.6% stake in Amerigo.

Amerigo shares have a 52-week range of .50-$1.00 and are currently trading at 59 cents, not far above 52-week lows. Plenty of pessimism appears to be baked into the stock, but there are plenty of catalysts going forward, such as measures taken to control costs and boost revenue. Copper is cooperating — the spot price has been fairly consistent in the past year, trading between $3.40 and $3.80 with occasional forays above or below that range.

Investors who buy Amerigo shares before the ex dividend date will also receive a relatively quick 3.5% return on capital. As Amerigo ramps up operations, revenue and profit should rise. It’s a reasonable assumption that the dividend will increase accordingly and any dividend hike would, of course, be bullish for shares. A quarterly or monthly payout would also certainly help.

Disclosure: I took a small position in Amerigo Resources this week. This blog should not be considered investment advice, and all investors need to do their own due diligence. Please read my disclaimer.

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