Atico Mining Corporation (TSXV: ATY) is a Canada-based company engaged in copper and gold mining and related activities, including exploration, development, extraction and processing in Colombia. It is also engaged in the acquisition, exploration and development of copper and gold projects in Latin America. The Company, through Minera El Roble S.A. (MINER), has interests in the El Roble mining property (El Roble). El Roble is an underground copper-gold-silver mine and processing plant, which is located in Choco, Colombia.

Investment Rationale

• Generating a higher return on Shareholders' money with RoE of ~17%: Return on equity ratio can be described as a financial ratio that helps measure a company's proficiency to generate profits from its shareholders' investments. This metric helps to gauge a company's effectiveness when it comes to using equity funding to run its daily operations. Trailing Twelve Month RoE of the Company stood at 17%, whereas Peer's average RoE stood at 13.6%; this shows Atico investors have a competitive advantage against the peer group.

• Generating Industry-leading RoA: The return on assets ratio measures how effectively a company can earn a return on its investment in assets. In other words, ROA shows how efficiently a company can convert the money used to purchase assets into net income or profits. The Company's TTM RoA stood at 10.5%, which is significantly high.

• Negligible Balance Sheet Risk: The Company has a strong balance sheet with a Debt/Equity ratio of 18% at the end of March 31, with strong debt protection metrics. The Company's interest coverage ratio stood at 23x. This shows that despite the penny cap market categorization of the Company, investors are not exposed to any balance sheet risk.

• Copper Continue to Remain Firm in Long-run: Copper consumption in electric vehicles (EVs) and charging stations in China is expected to grow roughly fivefold by 2025 from last year's levels, according to some market reports. The enormous demand potential for copper in the mid to long run would help to keep the copper prices elevated, which would benefit most copper miners.

• Gold Is Again Gaining Momentum: Given the recent resurgence of the COVID-19 cases in Europe and North America, uncertainties around the capital market instruments are rising especially speculative asset classes. Demand for safe-haven bullion can be in the limelight in the near term, and gold prices are expected to remain elevated throughout 2021. Higher gold prices would continue to benefit gold miners on the back of higher realization prices.

• Free Cash Flow Yield of 19%- Strong Margin of Safety: Free cash flow yield is important for any business, large or small. Cash flow is always an important metric for a company, as it shows – primarily to investors – its operating performance. In the case of Atico, FCF Yield is approximately 19% which is gigantically higher and shows that the Company has enough liquidity to fund its operation without accessing debt or sale of Company's assets.

• Technical Indicators are Showing Potential Upside: On the daily price chart, the prices are trading in a rising channel pattern and taking support at the lower band of it, which suggest that the bulls are still in action. Moreover, the 14 days RSI is reflecting a positive diversion, which suggests that there is potential for an upside move in the stock.

Source: REFINITIV, Analysis by Kalkine Group

• Risk Associated to Investment: The Company is exposed to volatility in the commodities prices it operates in. A 10% change in copper and gold prices would result in an increase/decrease of approximately USD 4,256,000 and USD 1,510,000, respectively, in the Company’s pre-tax income or loss on an annualized basis. Further, the Company is exposed to interest rate risks, as a 10% change in LIBOR rates would result in an increase/decrease of approximately USD 5,000 in the Company’s pre-tax income or loss on an annualized basis based on the loan and credit facilities used.

Financial Highlights: Q1FY21

Source: Company

• Sales for the period increased 155% to USD 19.3 million when compared with USD 7.6 million in Q1-2020. Copper and gold accounted for 92% and 8% of the 10,125 dry metric tonnes (Q1-2020 – 8,588) shipped and invoiced during Q1-2021.
• The average realized price per metal on invoicing was USD 4.05 (Q1-2020 - USD 2.18) per pound of copper and USD 1,728 (Q1-2020 - USD 1,578) per ounce of gold.
• Cash costs were USD 125.24 per tonne of processed ore and USD 1.67 per pound of payable copper produced, which were increased 23% and 48% over Q1-2020, respectively.
• The increase in the cash cost per pound of payable copper net of by products is primarily explained by a higher cost per processed tonne, along with lower by-product credit from gold.
• All-in sustaining cash cost per payable pound of copper produced was USD 2.85 (Q1-2020 - USD 1.60).
• Cash margin was USD 2.38 (Q1-2020 - USD 1.04) per pound of payable copper produced, which was an increase of 126% over Q1-2020.
• Net income for the three months ended March 31, 2021, amounted to USD 1.2 million, compared with a loss of USD 1.6 million for the comparative period.
• In Q1-2021, the Company produced 4.5 million lbs of copper, 2,134 oz of gold, and 7,870 oz of silver. When compared to Q1-2020, production decreased by 9.0% for copper and 19.7% for gold.
• The decrease for both copper and gold is mostly explained by 6.9% decrease in processed ore, while for gold an additional factor was a 12.8% decrease in head grade.
• Cash costs for the period were USD 125.24 per tonne of processed ore, and USD 1.67 per pound of payable copper produced, increases of 23% and 48% over Q1-2020, respectively.
• All-in sustaining cash cost per payable pound of copper produced was USD 2.85.

Top-10 Shareholders

Top-10 shareholders together hold 16.84% stake in the company, with Goodman (Jonathan Carter) and Konwave AG are among the major investors, with an outstanding position of 3.41% and 3.34%, respectively. Institutional ownership in the company stood at 4.2% and strategic entities holding stood at ~13%.

Valuation Methodology (Illustrative): EV to Sales based Valuation Metrics

Note: Premium (discount) is based on our assessment of the company’s growth drivers, economic moat, competitive advantage, stock’s current and historical multiple against peer group average/median and investment risks.

Stock Recommendation: The Company closed the quarter showing a strong cash position of USD 9.2 million and USD 18 million in trade receivables, which were mostly realized in early April. The company strives to maintain sufficient liquidity to meet its short-term business requirements, taking into account its anticipated cash flows from operations, its holdings of cash, and its committed liabilities.  Moreover, the company is striving to make up for the lost production throughout the remainder of this year to meet the annual guidance and take full advantage of the higher metal price environment. Further, the company is delivering very strong return on shareholder’s money.

Copper prices are expected to remain firm on the back of higher application of red metal in EV sector and demand is expected to jump sharply in next few years. This would help the group in delivering a strong performance in the near to medium, term.

Also, on technical price chart, the stock is trading in a rising channel pattern and taking support at the lower band of it, which suggests that bulls are still in action.

Therefore, based on the above rationale and valuation, we recommend a "Speculative Buy" rating on the stock at the closing price of CAD 0.55 on July 20, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary

Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

*Recommendation is valid at July 21, 2021 price as well.

Disclaimer

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