Atalaya Mining - Leveraged Production Play on the Copper Price

• Atalaya Mining has been producing copper in southern Spain for eight years, with mining reserves estimated to last over 15 more years. The company also has other development projects in the Iberian Peninsula.
• The Q1 results showed a production of 12,000 tons of copper. Despite global inflation and high electricity prices, the company managed to reduce its all-in sustaining cost (AISC) of production from 3.50 the previous year to 3.12, mainly due to lower energy prices and a strategic electricity contract.
• Cash flow from operating activities decreased from the previous year's Q1, primarily due to lower copper prices.
• Atalaya maintains a strong balance sheet, continuing its investments and managing its debts.
• The CEO believes the current drop in copper prices is temporary and foresees a long-term demand for copper, especially with the global shift towards decarbonization and electrification.
• Atalaya has plans to double its production in the coming years and is focusing on expanding its mining efforts, leveraging existing facilities and cash flow without significantly altering its balance sheet.

Leveraged Production Growth On Higher Copper Prices

Atalaya Mining (ATYM) is a copper producer based in southern Spain with a promising growth outlook. In this interview, CEO Alberto Lavandeira discusses the company's latest quarterly results, views on the copper market, and strategic plans to substantially increase production. He makes a bullish long-term case for copper demand growth amid decarbonization trends, suggesting Atalaya is well-positioned with leverage to higher prices.

Q1 Results Show Lower Costs Despite Inflation

In Q1 2022, Atalaya produced 12,100 tons of copper at an all-in sustaining cost of $3.12/lb, versus $3.50/lb in Q1 2021. This cost reduction mainly resulted from much lower electricity prices in Spain. Last year, gas prices spiked before the Ukraine war, driving up electricity costs. This year, increased solar/wind generation in Spain combined with Atalaya securing lower long-term electricity rates for a third of its needs led to a significant decrease in power costs. Lower input costs like diesel and explosives also contributed.

However, the Q1 cash cost reduction was offset by weaker copper pricing, with an average $4/lb realized versus $4.50/lb in Q1 2021. This drove lower operating cash flow of $12 million in Q1 2022 versus $28 million last year. But the company maintains a strong balance sheet to fund expansion projects through existing facilities and cash flow.

Copper Market Outlook

After reaching $4/lb earlier this year, copper prices have fallen to the $3.60s on global recession fears. But Atalaya believes copper fundamentals remain positive long-term, with prices likely to recover. At current levels, new mines are uneconomical given inflationary pressures on operating and capital costs. With global electrification and decarbonization driving copper demand, new supply is needed. Atalaya expects a coming copper age, with the metal being fundamental to green energy initiatives.

Progress On Doubling Production

Atalaya aims to double copper production from 55,000 tons to 110,000 tons within the next 4-6 years. This will come through mining higher grade satellite deposits and adding a zinc recovery circuit. The first phase involves accessing nearby deposits over the next four years that contain copper-zinc mineralization with better grades than the current ore. This higher-grade feed can boost copper output within the existing plant capacity. Mining these satellite pits is slated to start in 2023.

The second phase will add a zinc recovery circuit to also produce zinc concentrates. This is envisioned within the next five years, likely coming online around 2026-2027. Once the zinc circuit is added, production can reach targeted levels above 100,000 tons per year of copper equivalent output.

Atalaya can fund these expansions through existing cash flow and facilities, assuming copper prices don't stay extremely depressed. While zinc output could be delayed if necessary, advancing the satellite pits in the near-term is optimal for maximizing value.

Progress On Proyecto Riotinto Permitting

Atalaya continues working to permit its Proyecto Riotinto copper project in northern Spain. Approval has been delayed over environmental concerns from legacy mining pollution in the area. But Atalaya has undertaken initiatives to obtain its social license, fix prior contamination issues, and update the water management plan.

Though the timing is uncertain, Atalaya remains confident Proyecto Riotinto will ultimately get approved given its environmental safeguards and tremendous economic potential. The long-life asset would further boost Atalaya's production profile and represents substantial upside.

Why Atalaya Mining Could Be An Attractive Investment

With copper fundamentals still strong and production set to significantly grow, Atalaya appears positioned to deliver increasing cash flows as prices recover. The company estimates over 15 years of reserves life, and is extending this through exploration and satellite projects. Proyecto Riotinto also provides huge option value. Atalaya Miniing's focus on Spain offers stability, with well-understood mining regulations and infrastructure. The company's efforts to improve environmental practices and community relations also help derisk operations.

With a current market capitalization of around $300 million, Atalaya's growth pipeline is substantial relative to its size. The potential doubling of copper production and the addition of zinc output could drive expanded profits at higher copper prices. This suggests investors get significant leverage.

For risk-tolerant investors bullish on electrification and decarbonization driving copper demand, Atalaya Mining provides concentrated exposure to potential price upside. Execution risks remain, but the company has a track record of delivering production growth and its strategic plans appear well aligned with long-term copper market trends.

The Investment Thesis for Atalaya Mining

Leverage to Copper Price Upside

If copper prices rise amid growing demand, Atalaya Mining's earnings and cash flows would significantly benefit given its pure-play copper exposure. There is substantial leverage in its operations to higher copper pricing.

Production Growth Pipeline

The company has clear plans to potentially double copper production over the next several years. This should drive higher absolute profits and cash flows as output expands, magnifying the upside from any copper price increases.

Long Mine Life With Exploration Upside

Atalaya has over 15 years of reserve life and is actively adding to this through exploration and development projects. Additional reserves add asset value.

Strong Project Economics

Management emphasizes that even at low long-term copper prices, the economics of their expansion projects remain very robust with high returns. This provides downside protection.

Valuation Appears Attractive

The current market cap of around $300 million seems inexpensive relative to the potential doubling in copper production capacity and cash flows. As the company executes on growth, its value should expand.

Jurisdictional Stability

Operating entirely in Spain provides stability amid mining-friendly regulations and infrastructure. This reduces operational risks.

Atalaya mining offers investors upside leverage to higher copper prices, an attractive valuation, significant production growth potential, and jurisdictional stability in Spain. For investors bullish on the copper market, it could be a good way to gain concentrated exposure to coming copper demand growth. Execution risks remain, but the reward potential appears favorable.