Atico Mining Corp

Strong Q1 Interrupted by Soon to be Over Strike

Impact: Positive

Atico announced strong Q1 production results (excluding the strike) and provided an update on the ongoing labour dispute that suggests that the mine should be up and running within two weeks. While the company has adjusted guidance to account for more than a two-month interruption, we expect the strong pace that Atico ended 2018 and started 2019 to resume in May. We continue to believe Atico is a low-cost producer with exploration upside that should generate significant free cash flow upon resumption of operations. 

  • Start of legally mandated arbitration should see operations resume in two weeks. As April 12 marked the 60th day that the mine had been under strike, Colombian law dictates that a legal mechanism to end the strike with an arbitrage process must begin. According to Colombian Labour Code, the process of assembling the arbitrator’s council is anticipated for the 8th working day following April 12, 2019 (~April 26th), after which operations should resume within 3 working days.
  • Solid Q1 start was interrupted by the strike. Results are well behind quarterly norms because of the strike; however, if we were extrapolating the results over a 90-day period, we see that the company was on pace for solid Q1. Mine production and throughput were on the same pace as Q4/18, with slightly lower copper grades offset by higher gold grades (Figure 1). We highlight that during the first part of Q1, Atico was on pace to meet its original 2019 guidance.
  • 2019 guidance to be adjusted. Over the long-term there is little change to the value of this mine/company; however, the company plans to update guidance once operations resume to what is expected to be almost 70 days missed of the planned 345. While there is likely to be a short adjustment period once the operation resumes, we expect the strong pace from the start of Q1 to continue.
Pending restart of operations creates a buying opportunity for a discounted stock. Based on what we expect over the next 12 months from Atico, our preliminary estimates suggest that Atico trades 1.7x-2.1x EBITDA or at an 12-15% FCF yield. When you consider that other base metal producers trade at 4.5x EBTIDA, its strong balance sheet and the exceptional exploration upside Atico appears to have, the resumption of operations and exploration has the potential to drive a significant re-rating. Upcoming Catalysts include 1) Exploration update (Q2/19), 2) 2018 Financial results (April 2019) and 3) Q1 Operating results (Q2/19).



Atico Mining Corp

Guidance Suggests More than the Market Cap Implies

Impact: Positive

Atico reported production results for Q4/18 setting records for both the quarter and the full-year 2018. We expect the steady ramp-up at El Roble to continue with 2019 guidance suggesting the company is poised to have another record year. We view Atico as an undervalued low-cost copper-gold producer, with significant exploration upside that we expect to generate significant free cash flow in 2019.
  • Record Q4, the result of a progressive ramp-up. The company produced 5.81 Mlbs Cu and 2.913 koz Au. Copper production was up 8% QoQ, and 9% YoY, while gold production was down 3% QoQ, and 2% YoY (Figure 1). The company’s continuous operating improvements have lead to a strengthened balance sheet allowing the for aggressively exploration of its very prospective land package in 2019 (Figure 2).
  • 2019 guidance points to the potential for another record year. With throughput steadily improving, the company finished 2018 strong. While corporate guidance suggests production is likely to be roughly flat in 2019 (20-21M lbs Cu, 10.-10.7koz Au) as compared to 2018 (21.9M lbs Cu, 11.3koz Au), we expect this historically conservative management team to at the very least hit the top end of guidance and likely beat.
  • 2019 guidance suggests the company is going to out perform its current valuation. Based on 2019 guidance, our preliminary estimates suggest the company should generate US$12-15M in EBITDA and US$4-5M in free cash flow at current copper prices. This is substantial when you consider the company’s current market cap (C$33.5M) and enterprise value (C$34.3M).
Atico currently trades at a steep discount to peers. Based on our preliminary estimates, Atico trades 1.7x-2.1x EBITDA or at an 12-15% FCF yield. When you consider that other base metal producers trade at 6.3x EBTIDA, Atico appears to be severely discounted. In addition, we believe this property has significant exploration upside and the company’s solid balance sheet (US$4.4M in cash and growing) has it well position to test the numerous targets that have developed over the years. Upcoming Catalysts include 1) Exploration update (Q1/19), 2) 2018 Financial results (April 2019) and 3) Q1 Operating results (Q2/19).

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