Why I think this little known copper miner can more than triple

2021年8月12日

ATALAYA - an update Tip: STRONG BUY Current price: 311.25 Target price: 1000

Bullish points: - Expansion plans
- Strong balance sheet
- Demand for copper is rising
- Copper market in deficit
- Lowly shares valuation
- Strong ESG credentials

Bearish points - Chinese commodity crackdown could hurt copper price
- Expansion execution risks
- Litigation issues

Atalaya is a small copper mining company that is listed on the AIM. A strong copper price meant that profits for the first half of 2021 reached 65,993,000 euros, a material sum in relation to Atalaya’s market cap of £429.52 million or €508.83 million. Assuming that in the second half the profits are indentical, profit for the whole year will be 131,986,000 giving the firm a P/E ratio of 3.9. This is hardly an exacting valuation keeping in mind that the current copper price per pound is 4.35 dollars compared to the average realised copper price for the first half of 3.92, around 10% higher. Keeping in mind that miners operate on a relatively fixed cost base and that increased metal prices will drop straight into the bottom line implies that earnings could actually be even higher than this. Cash conversion was similarly strong with operating cash flow standing at 70,999,000.

The company also has a very strong balance sheet with net cash of 37,777,000 euros meaning that on an EV to earnings ratio Atalaya is cheaper still. This implies that it should not be in financial difficulty, a working capital surplus of 90,892,000 euros reiterates this.

Admittedly Atalaya is having some litigation issues with Astor management surrounding wether they should pay some interest on an expense (€53 million) which Atalaya paid early, but given their massive working capital surplus Atalaya should have no issue paying any bills which in themselves should be minor. What’s more is that the company is confident that no interest should be paid as Astor’s claims for an early trial without the need for a full trial have been dismissed.

Atalaya also has the possibility for further expansion, currently its only producing project is Proyecto Rio Tinto, however it has expansion possibilities at Proyecto Touro, Proyecto Mass Valverde and Proyecto Rio Tinto Este. Admittedly, having a project is different from having a working mine, but Atalaya’s strong cash conversion and a working capital surplus should fund the exploration. Issues also surround the environmental impacts of the mining, for example Proyecto Touro was rejected by the local government due to the environmental concerns Pam however, the group have taken steps to lower the impact such as ensuring that there is zero discharge from the mine, the new project will be presented to the government in Q3 2021. With regards to the producing Proyecto Rio Tinto, further deposits have been found at San Dionsino and the Cerro Colorado open pit has been comforted as a long life status implying that copper production will remain robust.

Atalaya also has found ways of boosting return without mining, for example it is building a 50MW solar plant at Proyecto Riotinto for self consumption and has also got plans for an industrial plant.

I also believe that over the long term the copper price will remain high given the demand backing it up. True, China by far the biggest consumer of copper will want to cool down its overheating economy and in the short term could depress the copper price. However, Biden’s infrastructure bill should provide additional demand for copper. Also over the long term demand for copper will increase, in fact it is expected to double between now and 2050. This is as a result of increased demand from EV’s and renewable energy sources, for example electric vehicles use almost 4 times as much copper as internal combustion vehicles (ICE’s.) Moreover, per MW of energy produced renewables use from 4 to 6 times as much as copper than fossil fuel plants. Clearly, the transition to electric vehicles and renewable energy sources will benefit copper, throw in the fact that copper is currently in deficit and it is easily possible to envisage copper remaining at these high levels or even beyond.

The fact that the shares are trading on a tiny P/E despite the strong demand for copper, strong balance sheet, strong ESG credentials, strong cash conversion and expansion plans it is easy to envisage a scenario where Atalaya’s share price will continue to rise strongly.

In fact I am raising my price target to 1000p current price, current price 311.25 p implying that the shares can rise by over 200% and in fact my 1000p price target could be conservative. STRONG BUY.

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