Amerigo Resources Ltd. (OTCQX: ARREF) is up nearly 28% in the previous 52 weeks and 13% year-to-date, outperforming the market. Adding in the 7.5% dividend yield, the company outperformed its competitors by a significant margin.
I’m bullish on the stock due to the company’s strong position in the macro picture, attractive valuation and solid financial performance.
Copper prices should be favorable
The price of copper has increased by around 21% in 2021 from $3.65 to $4.41 per pound and is currently trading around the same price despite some volatility in 2022. With the growing demand for copper in this era of the green initiative, the commercial economy expects prices to rise. increase in the second half of 2022, through 2023. Meanwhile, Goldman Sachs (GS) expects the number to hit $5.5/lb by the end of 2022.
After a strong EBITDA of over $90 million in 2021, the company has made the following EBITDA guidance based on the different copper prices.
Considering that its first quarter production of 16.5 million pounds and cash costs are already in line with the full year guidance, the company is expected to show promising results in its first quarter earnings report.
With copper prices expected to take off heading into the third quarter, second quarter price levels are likely to be disappointing relative to the rest of the year. However, the current realized copper price of $4.64 puts the company at the upper end of its EBITDA guidance, meaning Amerigo should have a financially strong year.
Legal and regulatory concerns are minimal
Chile is currently considering increasing its royalties and taxes on copper mining companies. However, as repeated by staff involved, the law is unlikely to pass in its current form anytime soon due to the detrimental effect it will have on the entire Chilean mining community. Additionally, the law is unlikely to affect Amerigo because the company is not considered a minor, as indicated by its CEO Aurora Davidson,
We are currently exempt from the existing tax in its current morphology because we are considered a toll processor and are in contract with Codelco. It’s for copper. For molybdenum, we are currently falling below the current tax threshold.
Even though Chile’s recent proposal to tighten environmental regulations was rejected, it is not directly threatened by such regulations due to the company’s strong ESG profile. Additionally, the country’s currency is near an all-time low against the US dollar, which means the business is spending in a weaker currency and earning a stronger one, leading to millions in foreign exchange gains.
The company’s forecast for 2022 indicates that a 10% change in the CLP exchange rate against the USD could impact cash costs by $0.07/lb, currently at $1.90/lb. lbs. The currency has already depreciated by 7.25% from the supposed levels of CLP 800 to CLP 858, working in favor of the company.
So, on the macroeconomic and regional laws and regulations front, the company should be strong.
The company outperforms the industry median, as well as its own 5-year average, by a wide margin. With rising prices, margins are likely to increase further if the business can control its costs, but as is evident, even current margins are very attractive if they keep them consistent.
As shown in the table below, the exceptional leveraged FCF margin, ROTC, ROE and ROTA metrics also speak to management’s ability to make optimal use of resources and its ability to translate its revenue. cash business. The CAPEX to sales ratio does not need to be high because business requirements do not dictate incremental increases.
By conventional valuation measures, the stock is undervalued, with nearly all price ratios below the industry median. Its TTM-based PE, PS, PB, PCF, and PEG of 5.72, 1.14, 1.57, 2.35, and 0.01 are all significantly lower than the respective industry medians of 16.29.1 .42, 2.12, 9.38 and 0.16.
Not only are the TTM-based metrics lower than the industry, but as is evident, growth has propelled the business, improving the forward ratio to desirable numbers. A median of the ARREF ratios mentioned above, both TTM and futures, based on the sector medians, gives us a price target of $1.95, an upside of 56%.
Since 2020, Amerigo has jumped on the rebound bandwagon and outperformed the market by a substantial margin with total returns of 211% versus 38% for the S&P 500.
Amerigo reinstated its dividend policy in the previous year after nearly a decade. With a forward dividend yield of 7.57%, yields can only improve, especially as an earnings yield of almost 13% and an FCF yield of over 35% means that the distribution is well covered.
Additionally, the company has a stock buyback program where it purchased 8.7 million shares in 2021 for $9 million. In 2022, the company plans to repurchase 9.2 million shares, and with the increase in sustainable dividends, one can reasonably expect overall returns to investors to increase.
The main risk that I see for the company’s performance in 2022 is related to the macro economy, in particular the price of copper. With its financial performance metrics deeply tied to copper prices, Amerigo’s finances are vulnerable to a bear market. A market price below expectations may lead to underperformance and possibly a year-over-year decline, which will negatively affect the company’s share price.
China’s global footprint is an important factor in regulating the free market prices of many commodities, including copper. Due to shutdowns in China, the world’s largest consumer of copper, downward pressure on the market has intensified in recent weeks. According to reports, the copper short position is currently as strong as it was during the pandemic. ARREF’s financial performance will be directly and visibly negatively impacted if this materializes.
Amerigo’s resources concluded a strong year in 2021, and the results for the first quarter of 2022 are very promising for the performance of the current year. Cash costs, raw material prices and production volume are likely to merge and reveal better annual results than forecast (16.5 * 4 = 66 million pounds).
I would have rated the stock as a strong buy were it not for its strong interconnection with copper prices and, therefore, the downside risk to those prices. Even though the risk is relatively low, the stock is vulnerable to high volatility with minor fluctuations in market conditions due to its low market capitalization.
The company has outperformed the market since the start of the year and is expected to continue this performance throughout the year, however, potential investors should weigh their risk appetite as ARREF is a small capitalization company, which generally has tend to be very volatile.