Cannacord note4 Feb 2019 09:31
this post is from TommyTT on ADFV
A lot of the following was covered on the Jan 3rd/15th updates.. We are classified as a M&A possibility and CANA "preferred pick"
Note out today....Can't format so only a cpl of items as 40+pgs on diversifieds and juniors+ graphs etc
Rating and Target Price Changes
An Argument for Growth
Have we all got demand wrong again?
We question the now settled consensus that there has been an end to structural
demand growth for metals. Five years after the peak in the mining capex cycle,
inventories in base metals are low by historical standards and falling and bulk
commodity prices have firmed. Even before recent supply disruption news, iron ore
prices have been cycling around prices almost double the troughs of 2015, and the
multi-hundred million tonne surpluses expected at the end of this decade have simply
not materialised.
What does this mean for investors?
Firstly, given tight fundamentals and unchallenging valuations, we believe there is
currently a strong case for including mining stocks in portfolios. The majors trade at
reasonable multiples (2019e EV/EBITDA 5.1x, P/E 11.1x, Div yield 4.6%) and we would
recommend RIO (upgraded to BUY from Hold, TP 4450p, up from 3780p) and AAL (BUY,
TP 2250p up from 2090p) in preference to BHP (Hold) and GLEN (Hold). We are not
assuming a return to rapid growth in our estimates, but see this as possible as senior
management potentially changes over the next year.
Secondly, we think stocks that recycle their cash flows into meaningful growth will
outperform over time and break out of established commodity/equity relationships. The
juniors are far more compelling as growth stories, with our preferred pick ATYM (Buy).
Atalaya Mining
Investment conclusion
Atalaya is an emerging copper producer, with an expanding operation at Rio Tinto in
southern Spain, and an attractive growth project, Touro, in northern Spain. We
published an update on ATYM on January 4 2019 following our visit to site in
December (please see Mispriced copper growth). We maintain our Buy rating and
330p target price.
In our view, ATYM is an attractive pure-play copper growth story. Whilst the market
understands the leverage to copper prices, we argue that it is missing ATYM's organic
growth and potential efficiency gains. We demonstrate that the market is discounting
broadly a scenario of Cu prices of approximately $2.80/lb, costs of $2.20/lb and Cu
output of 40kt/y. The combination of a 5% reduction in unit costs, a copper price
recovery to $3/lb and output growth to 55kt/y has the potential to double EBITDA for
a producer like ATYM.
ATYM is conducting a strategic review, however as we discuss in the note above, we
would argue there is little potential M&A premium in the current price and we see no
evidence that management is any less engaged or enthused about finishing the
expansion and pursuing growth options if ATYM remains in its current form.
Production
CANT P
Sign In
Follow the stocks
