Atico Mining Corporation (TSXV: ATY) is a Canada-based company engaged in copper-gold mining and related activities, including exploration, development, extraction and processing in Colombia and 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 operating copper-gold mine in Colombia. El Roble is an underground copper-gold-silver mine and processing plant, which is in Choco, Colombia.

Investment Rationale

• Gold is Likely to Continue to Remain in the Investor's Limelight: Given the recent resurgence on the COVID-19 cases in Europe and North America, uncertainties around the capital market instruments are rising, especially in 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. A higher gold price would continue to benefit gold miners on the back of higher realization prices. Further, the gold has recorded a decent rally since March 2020, and many miners are generating a lot of free cash flow, which help them to deleverage their balance sheet and bolstered their financial health.

• Copper would Remain Hot on the Back of Higher Industrial Uses: 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 the recent report came from the Bank of China. The enormous demand potential for copper in the mid to long run would keep the copper prices elevated, which would benefit most of the copper miners. Also, US President Joe Biden trillion-dollar infrastructure bill would also increase industrial copper demand. Hence, copper prices are likely to remain elevated regardless of short-term volatilities.

• Strong RoE of 15.7%: 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 profitability helps to gauge a company's effectiveness when it comes to using equity funding to run its daily operations. Trailing Twelve Months, ROE of the company stood at 15.7%, whereas Peer's average ROE stood at 13.6%. This shows Atico investors have a decent competitive advantage against the peer group.

• Industry Leading ROA: The company has a strong LTM ROA of 9.8%. 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 in purchasing assets into net income or profits.

• Strong Balance Sheet: The company has a strong balance sheet with a Debt/Equity ratio of 13% at the end of March 31, with strong debt protection metrics (interest coverage ratio of 8.81x). This shows that despite the penny cap market categorization of the company, investors are not exposed to balance sheet risk. Further, we expect that the operating leverage of the company would remain higher in coming quarters which would help Atico to throw a lot of free cash flow, which is further going to lower Debt and strengthen the balance sheet.

• Strong Margin of Safety: Atico shares are offering a strong margin of safety to its existing as well as potential investors as the company's Free Cash Flow Yield Stood at 26.8%, which is gigantically higher and indicates has strong liquidity position to cover its capital expenditure from its internal accruals. Cash flow is always an important metric for a company, as it shows – primarily to investors – its operating performance.

• Risk Associated to Investment: The company is primarily exposed to commodity price volatility risks, especially gold and copper. Any unprecedented downturn in these commodities could have a material impact on the company financial performance and its stock price. Further, short-term uncertainties over a resurgence in the covid-19 cases in China and Western countries could keep the company shares a little volatile as commodity prices have been volatile over the past few weeks.

Financial Highlights: Q2FY21

Source: Company Profile

• In the second quarter of FY21, the company reported a topline growth of 5% on YoY basis and revenue stood at USD 13.4 million vs USD 12.86 million in Q2FY20.
• Copper and gold accounted for 93% and 7% of the 7,812 (Q2FY20 - 9,014) dry metric tonnes (“DMT”) shipped and invoiced during Q2FY2021.
• The average realized price per metal on invoicing was USD 4.50 (Q2FY20 - USD 2.60) per pound (“lbs”) of copper and USD 1,878/oz of gold vs USD 1,726/oz in Q2FY20.
• Working capital was USD 23.3 million (December 31, 2020 – USD 22.5 million), while the Company had USD 6.4 million (December 31, 2020 – USD 6.8 million) in long-term loans payable.
• Cash costs were USD 118.24 per tonne of processed ore and USD 1.27 per pound of payable copper produced, which were increases of 26% and 37% over Q2FY20, respectively.
• The increase in the cash cost per pound of payable copper net of by products is mainly explained by a 10% decrease in payable copper produced and increases in onsite costs per tonne processed.
• All-in sustaining cash cost per payable pound of copper produced was USD 2.10 (Q2FY20 – USD 1.34).
• In Q2FY2021, the Company produced 4.46 million lbs of copper, 2,732 oz of gold, and 10,104 oz of silver. When compared to same period in 2020, production decreased by 10% for copper and no change for gold. The decrease for copper is mostly explained by 5% decrease in processed ore and head grade.
• Net income for the three months ended June 30, 2021 amounted to USD 0.6 million, compared with USD 1.2 million for the comparative period. Net income was affected by foreign exchange loss, higher production costs, and a decrease in concentrate sold, partially offset by a higher realized copper price, as compared to Q2FY20

Top-10 Shareholders

Top-10 shareholders together holds 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%, respectively.

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 exited the quarter with much stronger financial health and balance sheet strength on the back of higher commodity realization prices. At the end of the Q2FY21, the company reported a strong cash position of USD 16.6 million along with USD 5.5 million in trade receivables 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.

RoE of 15.7% is best among the company's comparable peers and reflect the strength of the business model and management over the competition.

Further, copper prices are expected to remain firm on the back of higher application of red metal in the EV sector and demand is expected to jump sharply in the next few years. Gold will, too, remain firm amid hovering uncertainties over the global equity market valuation.

However, the company is exposed to a variety of risks ranging from commodity price risk, interest rate risk, forex risk as well.

Therefore, based on the above rationale and valuation, we recommend a "Speculative Buy" rating on the stock at the closing price of CAD 0.52 on September 14, 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

1-Year Price Chart (as on September 14, 2021). Source: Refinitiv, Analysis by Kalkine Group

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

*Recommendation is valid on September 15, 2021 price as well.

Disclaimer

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