RESOURCEStocks: The ARG share price is at its highest level in five years, and well up on a year ago. Notwithstanding a 16.5% increase in the copper price YTD, is that a decent reflection of the progress you have made this year, or has ARG just turned the corner?
Rob Henderson: I believe that investor awareness of Amerigo is improving and our recent Q3 earnings of US$7.9 million demonstrate that we can generate good cash flow at a copper price of US$3.00/lb. Having said that I believe that our market capitalization of about US$150 million is relatively low given that we currently produce 62 million lbs of copper per year. Our investors get 0.4 lbs/yr copper for every dollar of market cap and this is double that of our peers. Our current price-to-earnings ratio is also very low, especially given that we will be increasing our production by 40% next year and reducing our cash costs.
RS: Given the leverage ARG offers to copper pricing, what are you seeing in the crystal ball for the metal in 2018 in terms of price upside?
RH: My crystal ball is a bit cloudy and I see the copper price staying flat in 2018 until the world’s copper supplies cannot meet demand and then the price will go up rapidly. The gurus forecast that this will happen in 2019.
RS: What have you seen in the (copper) market of late that has got your attention/why?
RH: I am seeing more junior financings taking place, more drilling done and more studies being completed. I believe this is a healthy start to the next cycle.
RS: What do revenues/total costs look like over the next six months based on current and/or trending price and cost paths?
RH: Production at our MVC facility in Chile should remain steady at current rates until Q3 next year and then should increase by 40% as our new plant comes on line. We are anticipating some cost inflation next year due to higher fuel and steel prices plus potential increases in the Chilean peso. We think that our cash costs in the second half of the year will be around $1.50/lb and cash costs in the first half of the year will be around $1.80/lb.
RS: What are any other catalysts, or factors, that you see supporting a higher ARG valuation?
RH: The biggest factor by far affecting our valuation is the copper price as this is directly related to our cash generation capability. A second factor is the health of the mining industry in general. I think the investors who abandoned the space five years ago are beginning to return now that industry price-to-earnings ratios are competitive again. For Amerigo, a major milestone expected in 2018 will be the completion of our phase two expansion project. Once the bank’s completion tests are met, Amerigo will be permitted to distribute dividends to our shareholders. We paid US$47 million in dividends over the periods of 2005 to 2008 and 2011 to 2012.
RS: You mentioned earlier this month that purchase orders for all the major equipment to be used in the current expansion (from c60-65Mlbs/yr Cu, to 85-90Mlbs/yr Cu) had been placed. Do you foresee any issues with delivery schedules given the higher levels of mining/processing capital equipment purchasing activity we are starting to see in the market?
RH: Most of the new equipment is being fabricated in Chile and appears to be well on schedule. Our regrind ball mill is being fabricated offshore and we have been advised that the mill delivery will be at the later end of the scheduled time frame. MVC are making contingency plans to temporarily use their existing regrind ball mill in case the new mill is late.
RS: Any other project delivery risks/mitigation measures?
RH: Just the normal issues of ensuring the work is done safely and efficiently. We are fortunate to have the same team at MVC who delivered the phase one expansion project on time and under budget and they know what they are doing.
RS: Is there any provision in your agreement with Codelco for higher payments/returns to them if copper reaches a certain (higher) pricing level?
RH: The royalty agreements between MVC and El Teniente are based on a sliding scale percentage of the copper price with upper and lower limits. For Cauquenes, the limits are $1.95/lb and $5.50/lb. If the copper price is outside these levels then the two parties have to agree on the rate to be applied.
RS: What is the view on hedging/locking in some of that stronger pricing, versus maintaining full exposure to rising copper?
RH: We do not have any copper hedges. If we think that copper price volatility is going to increase substantially we would consider purchasing put options which would lock in a floor price and maintain exposure to rising prices. However, this is expensive and we believe that the costs at MVC are robust enough to survive low copper prices as they have managed to do for the last 25 years. We have been patient over the last low price cycle and we intend to fully benefit from the anticipated upcoming high price cycle.