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Resourcex Reports: Standing in the Shadow of Codelco

0 Comments|March 5, 2007

Copper production that's more than just pennies in the bank

Copper production that's more than just pennies in the bank

How do you define "cash machine"? Michael Kuti, the general counsel for Amerigo Resources Corp. (TSX: T.ARG, BullBoards), recently told me it was this: Annual copper and molybdenum production totaling 60 million pounds and 1 million pounds respectively. At today's prices, that's an annual gross value of $191 million. What makes this so attractive, however, is that Amerigo's production is derived solely from tailings, the byproduct of milling at the mother of all copper mines.

A few years ago, Amerigo Resources negotiated the purchase of Minera Valle Central (MVC) from a group of former Codelco managers. MVC, which is now a subsidiary of Amerigo, processes copper tailings from Codelco's massive El Teniente mine in Chile. Codelco is the world's largest copper producer, supplying 21% of the world's copper annually. Since 2003, Codelco has been supplying MVC with 90,000 tonnes of copper tailings daily.

Amerigo also purchased the right to treat the higher-grade tailings from a 200 million tonne in situ tailings impoundment known as Colihues located next to MVC's plant. These tailings are the result of mining activity at El Teniente throughout the 1970s and 80s. In 2006, Amerigo submitted a technical report on Colihues that confirmed an inferred mineral resource of 213 million tonnes grading 0.262% copper and 0.01% molybdenum. Amerigo can process up to 45,000 tonnes daily, though the company is still ramping up production there.

Adjacent to Colihues is the Cauquenes tailings deposit, which contains an estimated 500 million tonnes of additional tailings. General Counsel Kuti is assured that Amerigo will also secure rights to this substantial mineral resource.

"Who else would they give it to?" Kuti asked. "We have a strong relationship. We're still negotiating for [Cauquenes], but it only makes sense that we'll acquire that one as well."

The MVC site is located 90 kilometers south of Santiago, Chile. MVC currently treats 135,000 tonnes per day of fresh tailings from El Teniente and in 2005 produced 30 million pounds of copper and 631,843 pounds of molybdenum.

To understand the value of Amerigo's prospects as an investment, it's best to revisit the company's May 2003 technical review of operations at MVC, back when Amerigo was negotiating the purchase and trading at 70 cents a share.

Amerigo contracted AMEC International to produce the 43-101 compliant technical report to assess the purchase and operations at MVC. At the time, the price of copper was 80 cents per pound and not moving anywhere fast. AMEC calculated the payback and associated risk analysis accordingly and found that the project was profitable under previous Codelco management, but was too small to interest Codelco.

Four years on, Amerigo has significantly expanded the facilities. More importantly, the price of copper has more than tripled to recent highs of $2.75 per pound.

Since copper began correcting last year, the markets sometimes give the impression that copper is in "bear" mode. This is, at least on an historic level, not true. In 2003 copper was wildly undervalued; its price had, with little exception, not been adjusted for inflation in decades, not to mention the supply/demand paradigm - China, China, China. Copper is now stabilizing at more than three times its 2003 price, which is both logical and cause for celebration at Amerigo.

AMEC calculated payback on the project using a copper price of 80 cents per pound, an acquisition cost of $20 million and annual production of 26.7 million pounds copper. Annual returns were, in this scenario, to total $5.8 million per year with payback occurring in 3.42 years.

Let's look at how things actually turned out: The price of copper is $2.75 per pound, though last year the company averaged $3.33 per pound in sales. Technical issues meant that MVC produced some 20% less copper than anticipated in 2006 (24.67 million pounds of copper and 674,549 pounds of molybdenum), though losses were offset by the elevated copper price.

Nevertheless, net earnings after tax for the year ended Dec. 31, 2006, were $39,283,683. Earnings per share for the year were 42 cents, compared with earnings per share of 23 cents in 2005. Shareholders were given semi-annual dividends of 4.5 cents per share in 2006, for total dividends of $7,449,203. The first dividend of 2007 will be 6.5 cents per share, a 45% increase on the last payout. At present, the company has more than $27 million in the bank.

In an effort to increase shareholder value, Amerigo last year began an aggressive program of repurchasing and eliminating shares. The company has reclaimed almost 700,000 so far and plans to eliminate 3% of the company's stock, which will reduce issued and outstanding to an estimated 87,093,841 shares.

Shrewd planning and sharp business acumen have won Amerigo excellent allies in the financial arena, including analyst and financier gargantua Raymond James ($33 billion in assets). RJ recommended Amerigo last year as a "Strong Buy" with a forecasted price of $2.90. Based on Amerigo's strong performance and deft handling of setbacks in 2006, RJ this year recommended Amerigo again as a "Strong Buy" and upped the share price forecast to $3.20. The company recently traded at $2.19.

Now that's a cash machine worth banking at.

Doug Hadfield is the Chief Editor of the Resourcex Investor, an internationally distributed newsletter specializing in identifying as-yet-undiscovered resource companies representing the best in their class. For more information, visit the website

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