KIM Report

At the Prospectors and Developers Association of Canada (PDAC) convention this March, I stopped by the booth of a company that I had visited last year and remembered to have stood out amongst the rest. Amerigo Resources (TSX-ARG) operates a facility in Chile near a huge copper (Cu) porphyry mine run by Codelco. Codelco is a nationalized Cu-mining company that owns 20% of the world’s Cu reserves and is run by the Chilean government. ARG has an agreement with Codelco to process the tailings from current and past mining operations at the El Teniente mine. These tailings are processed for mostly Cu, but with some molybdenum (Mo) credits as well. The royalties paid by ARG to Codelco vary with the Cu price and are capped at 13.5 % for a Cu price of (US) $1.20/lb or higher. The current Cu price is over $3.50/lb.

What really attracted me to investing in ARG was their steady business model. They do not have any mining or crushing costs. Nor do they have any exploration costs as the old tailings piles represent around thirty years of stockpile, and El Teniente is expected to be in production and providing fresh tailings for at least another sixty years. As a result of their steady production, they can pay out a $0.065 (CAD) semi-annual dividend, an annual return of almost 6% at recent prices.

ARG management has a good record of getting tasks done on schedule. Their plant to recover Mo from the tailings was built in 3 months, ahead of schedule and was paid back in only three months. Current projects are the expansion of their main plant, the installation of generators to offset energy costs, and negotiations with Codelco to process the higher grade (older tailings are 0.3 % Cu vs. newer tailings at 0.1 % Cu on average) tailings from historic production (Colihues tailings pond and others).

Company representatives at the PDAC commented that 2007 profit was cut into by increasing electricity costs that have plagued South America recently. They are awaiting delivery of two large generators from overseas to combat this problem. The generators will burn relatively cheap bunker oil to produce the electricity. They also commented that they expect the negotiations regarding their access to the old tailings piles to wrap up by the end of spring.

In spite of increasing energy costs, ARG managed to increase Cu output by 35% last year from 2006 numbers. The company also increased its annual cash flow to (CAD) $0.33/share from $0.29/share in 2006. Good investments in juniors such as Chariot Resources (TSX-CHD) amd Candente Resources Corporation (TSX-DNT) have contributed to this strong cash flow. ARG also has zero long term debt.

I got in at this share price as it is near historic lows and gives a strong return. I do not personally know of any other base metal producers paying out such a high dividend. On the downside, ARG is sensitive to Cu and Mo price fluctuations (i.e. the occasional hand-wringing and incompetence south of the border), along with increaing electricty costs. These problems are tempered somewhate by the factors described above, and the long-term demand from growing economies (e.g. the BRIC countries). Of course, most mining companies have found new 52 week lows during these past 52 weeks and dividends are not set in stone, so do your own due diligence when investing.

Disclaimer: The Author holds 500 shares of Amerigo Resources. This article is intended for entertainment purposes only and is based on the author’s personal opinion and experience. Investors are responsible for their own due diligence when investing.