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The Low-Risk/High-Reward Copper Play

Jeff Nielson Jeff Nielson, Stockhouse
0 Comments| November 16, 2017


Click to enlargeAmerigo Resources Ltd. (TSX: ARG, OTCQB: ARREF, Forum) is a junior copper producer that likes to describe itself as “innovative”. To some investors, that word implies “speculative”: the Company is doing something different, and therefore there is an element of uncertainty.

However, ARG also bills itself as a “low-risk” copper investment. Clearly Amerigo Resources is not your typical copper producer.

The Amerigo story starts in Chile. Chile is the world’s leading copper producing nation. Within the Chilean copper industry, one name dominates: CODELCO – Chile’s state-owned copper company. CODELCO is the world’s largest copper producer, with a number of huge operational mines.

One of these mines is the El Teniente underground copper mine, the world’s largest underground copper mining operation. El Teniente has a production rate of 130,000 tonnes per day. As with most mining operations, this extraction and processing of rock produces tailings.

In the case of El Teniente, the copper ore being mined is quite rich. Even after primary processing, the tailings that flow from El Teniente still contain relatively significant levels of copper: 0.12% Cu. Copper mineralization at that level is generally not sufficient to conduct primary mining operations. However, when that copper is literally fed directly into your own processing facility, the economics become much more robust.

Amerigo_ElTeniente.jpg
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Where most of the mining industry saw “waste”, Dr. Klaus Zeitler saw opportunity. In 2003; Dr. Zeitler founded Amerigo Resources, with the vision of monetizing the vast flow of tailings from the El Teniente Mine. Today Dr. Zeitler serves as ARG’s Executive Chairman.

Klaus Zeitler is a well-known name in the mining industry with more than four decades of accumulated expertise. The founder of Inmet Mining Corporation, he has also served as a long-term director of mining icons Teck Corp. and Cominco Limited.

Amerigo’s vehicle for turning El Teniente’s tailings into shareholder profits is the MVC processing facility. MVC is Amerigo’s 100-owned facility, situated directly adjacent to Cauquenes. The plant has been producing copper concentrates since 1992, and will celebrate its 25th year of operations this month.

MVC is a huge processing plant. Not only can it easily absorb the entire 130,000 tonnes per day flow of new tailings from El Teniente, it is also processing “historic” tailings from El Teniente’s mining operations.

Click to enlarge

Understanding the logistics for this tailings operation requires some understanding of the local geography. El Teniente operates at a relatively high elevation. This makes collection of tailings at/near the mine site problematic. The solution? A 40-kilometer long concrete channel feeds the tailings down from El Teniente to the Cauquenes tailings impoundment, located in geography more suitable for tailings collection.

This is where the Amerigo story becomes much more interesting. El Teniente is not merely the world’s largest underground copper mining operation today. This mega-mine has been in production for more than 100 years. Over that period of time, the mine has produced staggering volumes of tailings, currently stored in three locations.

Why these details become especially interesting for ARG shareholders is that in previous decades of operations recovery levels at El Teniente weren’t as high as they are today. Put in opposite terms, the older tailings from El Teniente contain significantly more copper. At Cauquenes, historic tailings collected from 1936 through 1977 have an average copper content of 0.27% Cu – more than double what is contained in the fresh tailings.

Along with the flow of fresh tailings (at 130,000 tonnes per day), MVC extracts the historic tailings at a rate of 60,000 tonnes per day using high pressure water, and pumps the material to their plant.  The plant uses conventional grinding and flotation technology to produce copper and molybdenum concentrates.

Together, these tailings are generating a current production level of 60 – 65 million lbs of copper per year. A December 2016 resource estimate lists 1.46 billion lbs of copper remaining to be recovered from the historic and fresh tailings from El Teniente.

Amerigo_Fundamental-(2).jpg
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[chart reproduced courtesy of Fundamental Research Corp.]

Now the low risk aspect to ARG’s business model is clear:

  • A huge production rate, but without the operational risks associated with primary mining operations
  • A partnership with the world’s largest, most-established copper producer
  • A long-term contract that extends to (at least) 2037

Low risk. Mining investors are familiar with some companies that deliver robust profits to their shareholders, while omitting the risk of actually operating their own mines. These are the mining royalty companies. They piggyback off of the operations of established producers, and deliver to their shareholders a guaranteed piece of the operational pie.

Amerigo’s business model is ultimately very similar. Its revenues flow directly from the mine production of the world’s largest underground copper mine. The pricing model with CODELCO yields upside potential to the Company and its shareholders, while also providing downside protection.

A new mine level being brought on line at El Teniente is expected to extend mine life by 50 years. As things stand today, ARG will likely still be producing copper at MVC when the grandchildren of today’s investors are doing their own investing.

What else do mining investors want to see when picking out their investments? Growth. This sets Amerigo apart from most royalty companies.

The Company’s tailings operations have delivered steady production growth over time. From 2003 through 2016, Amerigo’s production more than doubled.

However, With Cauquenes production from Phase One now fully ramped up, ARG’s production level has jumped from 25 million lbs per year to the current 60 – 65 million lbs of copper production. In Q3 2017 alone, MVC produced 15.5 million lbs. at cash costs of US$1.69/lb. A glance at ARG’s chart shows the market rewarding the Company’s shareholders for this impressive performance.

Amerigo_1yrshare.jpg
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This strong growth has taken Amerigo to a new level in copper production and earnings, but management believes there is still more to come. The Company’s President and CEO is Rob Henderson. While most mining companies are led by geologists or sometimes financial professionals, ARG is led by a career engineer – expertise especially suitable for the nature of Amerigo’s operations.

CEO Henderson is executing a carefully thought out plan to undertake the Cauquenes expansion project in two phases, which management believes reduces project risk and facilitates financing. Phase One was completed in December 2015, on time and under budget by MVC’s General Manager, Christian Caceres, enabling MVC to extract Cauquenes tailings for processing in MVC’s existing processing plant.

Amerigo_CauquenesII-(2).jpg
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The Cauquenes Phase Two Expansion project will improve flotation recovery efficiency and enable MVC to reach an estimated annual production of 85 to 90 million pounds of copper, with cash costs declining to as low as $1.40/lb . At a price-tag of US$35 million, the project is already fully funded and the estimated completion date is Q3 of 2018.

The boost to production and improved cash costs are both tied into the same factor: significantly higher recovery levels. Presently, copper recovery from historic Cauquenes tailings averages approximately 34%.

Phase Two will raise this recovery level to 49%. This improved recovery rate translates into 44% more copper production from the same feed rate into the MVC plant. How will these operational improvements be generated? Better flotation.

The MVC plant uses a conventional flotation circuit for copper recovery. As the name implies, a flotation circuit causes copper sulphide to attach to air bubbles and float to the surface, where it is collected. With the nature of this technology, more flotation tank capacity means a higher recovery rate.

The Cauquenes Phase Two expansion will roughly double the time that minerals come into contact with bubbles. That means more copper for ARG, and more profits for the Company’s shareholders.

How much profit? This leads to the other factor that makes Amerigo a low-risk/high-reward investment opportunity today. Mining is a cyclical industry.

Because it takes 5 – 10 years to bring a new mine into production, the response by the mining industry to rising demand is always uneven. The inability of the mining industry to finance new mines during periods of low prices means that resulting supply shortfalls push prices too high.

A long term chart for copper shows the tremendous bull market that ran for several years before running out of steam in 2011. A cyclical glut in copper resulted and the copper market has endured several years of lower price levels.

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[chart reproduced courtesy of InfoMine.com]

However, the sector bottomed through 2015 and 2016. Price levels have been rising since then. Industry analyst Wood Mackenzie points to a new supply gap materializing in the copper sector over the course of the next three years. Current price levels don’t represent the end of the recovery with copper, merely the beginning.

Put altogether, these factors provide very attractive parameters for investors looking at this low-risk copper producer:

  1. Copper production rising by ~ 40% (from 60 – 65 million lbs up to 85 - 90 million lbs)
  2. Cash costs declining by ~15% (from US$1.65/lb to US$1.40/lb)
  3. Rising copper prices (from the current price of US$3.08/lb)

Amerigo_leverage.jpg
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ARG has already delivered impressive performance for shareholders over the past 12 months. Now the Company is set to deliver significantly more production at better margins, in what is perceived to be a strengthening price environment for the copper market.

For investors who want more, with its low-risk business model and robust revenue streams, Amerigo has traditionally paid out a dividend to its shareholders, paying out over US$47 million since 2003. The dividend was temporarily suspended due to a combination of low copper prices and the need to fund Cauquenes.

With the Cauquenes expansion funded and copper prices rising, CEO Henderson hinted that ARG’s dividend payments could resume as soon as 2019, in a conference call with Stockhouse Editorial. And with Amerigo on track to hit new plateaus in both revenues and profitability, this has led to thoughts of replicating the Company’s success with El Teniente.

Rob Henderson provides some insights on what sort of operations would interest Amerigo – as a new project.

We believe that we have the expertise to successfully build and operate another tailings processing facility somewhere else in the world. We think that size and grade are the most important attributes, metal type is not as critical. Our innovative business model allows the tailings owner to benefit from an asset that is not on their books.

Copper tailings production doesn’t sound very sexy. However, with a business model that features low risk, high reward, and a dividend payment as a bonus, many investors would view Amerigo Resources as a very attractive addition to their own portfolio.


FULL DISCLOSURE: Amerigo Resources Ltd. is a paid client of Stockhouse Publishing.

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