Every UK investor has heard of Rio Tinto (RIO), but fewer will know what happened to its eponymous mine, once the planet's biggest copper producer. Located near the Andalucian city of Huelva, the site is now wholly owned by Aim-traded Atalaya Mining (ATYM), known until last year as EMED Mining. Resource depletion means it's rarely wise to trumpet a mine's historical accolades, but that's not true of the Proyecto Riotinto, which remains world-class. And with several financing obstacles out of the way, and a production ramp-up nearly complete, Atalaya is looking seriously undervalued. That is likely due to sagging copper prices, but as Riotinto should prove cash generative well below current spot prices, and is among the lowest-cost projects anywhere, Atalaya looks very well geared to a recovery in the metal.
- Low-cost Riotinto mine
- Cash flows coming through
- Well leveraged to copper recovery
- Debt free
- Commodity volatility
- Legal dispute
It was a drop in the price of copper to below $1/lb that shuttered Riotinto in 2001. The project then lay dormant until 2006, when EMED listed with plans to restart operations. For several years, those efforts floundered under management that the current leadership team says was ill-equipped to navigate the country's planning bureaucracy or language.
The picture has dramatically improved. In April, Atalaya's deeply-experienced, largely native management team dragged Riotinto into the 21st century and commercial production once more. Not only was this done ahead of schedule, but for a fraction of the projected cost. The initial expansion phase - which allows for the annual processing of 5m tonnes (Mtpa) of copper ore - had been assigned a budget of $199m (€137m) but was completed for just $83m. Those savings, together with cash generated from early production, means Atalaya can fund most, if not all, of the next expansion stage to a maximum capacity of 9.5Mtpa.
That should be finished by January 2017, and although this may require some short-term working capital financing, this is unlikely to be costly. Atalaya has no debt, and once fully developed should be cash generative even were copper to fall to $1.57/lb compared with a current spot price of $2.10/lb. Future working capital requirements are unlikely to be too demanding either: Riotinto sits at the foot of the capital intensity cost curve at just $4,100 per tonne of copper production, thanks to its resource grade of 0.46 per cent, proximity to the sea and access to power and water.
The mine's infrastructure and resources has not escaped the attention of industry players. Following last year's E137m capital raising, a shareholder quartet comprising commodity trader Trafigura, private equity fund Orion Mine Finance, a subsidiary of insurer Liberty Mutual and Chinese copper group XGC emerged with 72.5 per cent of the equity.
One counterparty is not onside, however. Last October, investment firm Astor Management filed a claim against Atalaya for the non-payment of cash it believes it is owed under a €53m (£40.6m) deferred consideration agreement signed in 2008. Atalaya argues it owes Astor nothing, as it has restarted production without recourse to a senior debt facility.
ATALAYA MINING (ATYM) | ||||
|---|---|---|---|---|
| ORD PRICE: | 98p | MARKET VALUE: | £114m | |
| TOUCH: | 95-100p | 12-MONTH HIGH: | 161p | LOW: 59p |
| FORWARD DIVIDEND YIELD: | 3.2% | FORWARD PE RATIO: | 4 | |
| NET ASSET VALUE: | 151¢ | NET CASH: | €18.6m | |
| Year to 31 Dec | Turnover (€m) | Pre-tax profit (€m)* | Earnings per share (¢)* | Dividend per share (¢) |
|---|---|---|---|---|
| 2013 | nil | -12.5 | -1.6 | nil |
| 2014 | nil | -11.2 | -25.5 | nil |
| 2015 | nil | -15.0 | -17.9 | nil |
| 2016* | 139 | 24.0 | 20.6 | nil |
| 2017* | 181 | 49.2 | 35.1 | 4.0 |
| % change | +30 | +105 | +70 | - |
Normal market size: 2,500 Market makers: 9 Beta: 0.80 £1=€1.29 *Peel Hunt forecasts, adjusted PTP and EPS figures | ||||
