Atalaya Mining - When Does Rising Energy Prices Affect Copper?

• Alberto Lavandeira, CEO of Atalaya Mining, discusses the company's operations, which focus on copper mining in Spain. The company, listed in London, has several projects under development and exploration throughout Spain. The main project had been dormant for 15 years before restarting in 2014.
• Atalaya faced a difficult quarter due to surging electricity prices in Spain, which increased by 400%. The spike in diesel costs also led to a strike by transport companies, disrupting operations for several days. Despite these challenges, the company managed to remain cash flow positive and ended the quarter with a better balance sheet.
• The increase in electricity prices began at the end of the previous year, largely driven by rising gas prices. Spain and Portugal's energy systems function like isolated islands, determining electricity prices based on the highest-cost producer. The invasion of Ukraine exacerbated the issue, but the primary problem lies in gas price dynamics, particularly as they are influenced by Russia.
• In the short term, Atalaya Mining has to wait for governmental actions to address the energy price crisis. However, long-term measures include signing power purchase agreements at lower rates and the construction of a solar farm for self-consumption. This solar farm will cater to about 22% of the company's energy needs.
• The demand for copper is expected to grow due to the shift towards renewable energy sources like solar and wind, which require significant copper infrastructure. However, accessing copper deposits is becoming more challenging due to deeper, lower-grade, and more environmentally sensitive locations. Even with these challenges, copper's role in various industries ensures a steady demand, leading to a potential "copper age."

Rising Costs and Rising Potential: Why Atalaya Mining is Poised for Growth

Spanish copper producer Atalaya Mining (LSE: ATYM) has faced significant cost pressures recently, but continues to generate cash flow while expanding production. CEO Alberto Lavandeira argues that while short-term costs are high, the long-term outlook for copper prices is extremely positive. With a pipeline of high-grade projects and new processing technologies, Atalaya offers substantial growth potential for investors.

Weathering Near-Term Headwinds

In the first quarter of 2022, Atalaya Mining faced “the most difficult quarter for the company based on costs,” according to Lavandeira. Electricity prices in Spain rose 400% due to high natural gas costs and the Russia-Ukraine conflict. Diesel and transport costs also jumped. A trucker strike related to fuel prices halted Atalaya’s operations for 10 days.

As a result, Atalaya’s cash operating costs per tonne increased significantly compared to 2021. However, the company remained cash flow positive in Q1 and increased its cash balance quarter-over-quarter. Lavandeira noted that while margins suffered in the short-term, Atalaya adapted its strategy to secure more predictable long-term power pricing.

Strong Fundamentals for Copper

Despite recent copper price volatility, Lavandeira argues that demand fundamentals are highly favorable for copper in the next 1-2 years. Ongoing electrification, grid upgrades, and electric vehicle adoption continue to drive copper consumption higher.

On the supply side, copper projects face increasing barriers like declining ore grades, remote locations, water scarcity, and tougher permitting. Lavandeira believes these challenges will constrain global copper supply growth in the next decade, leading to sustained higher prices.

High-Grade Projects Ready for Development

Atalaya’s flagship Riotinto mine in Spain has 15 years of reserves left, but the company has several advanced projects that can significantly expand production. The San Dionisio and San Antonio deposits are located next to Riotinto and contain far higher grades than Atalaya’s current operations. Lavandeira states these projects could increase Atalaya’s copper production from 55,000 tonnes to 75,000 tonnes in under 2 years once permits are secured.

In addition, Atalaya Mining is expanding exploration at Proyecto Masa Valverde, another high-grade copper asset in its development pipeline. The company is also testing and constructing a new processing technology called Helix that could substantially improve recoveries across its polymetallic deposits.

Returning Cash to Shareholders

Despite investing in growth projects, Atalaya Mining has committed to returning 30-50% of free cash flow to shareholders through dividends. The company paid its first dividend in 2021 and intends to continue payouts this year.

Attractive Risk/Reward for Investors

Atalaya Mining faced significant cost inflation in Q1 2022 that hit margins. However, the company continues to generate free cash flow while expanding production. With copper fundamentals remaining strong and high-grade projects in the pipeline, Atalaya offers investors production growth potential and dividend income.

The company expects its San Dionisio and San Antonio projects to expand copper output by 75,000 tonnes in the next 1-2 years. New processing methods could further boost metal recoveries and cash flow. Trading at a forward P/E of just 5x, Atalaya Mining offers compelling value relative to its growth opportunities. Investors seeking copper exposure with reinvestment upside and dividends should take a closer look at this hidden gem.

The Investment Thesis for Atalaya Mining

• Strong management team with s track record of success - CEO Alberto Lavandeira has extensive mining experience and has grown Atalaya Mining substantially since taking over in 2014. The company has a proven ability to execute.
• Favorable jurisdiction - Atalaya's operations in Spain provide stability and support, with excellent community relations. This avoids many of the political/social risks found in other mining jurisdictions.
• Clear growth roadmap - The company has laid out a clear strategy to grow copper production from 55k tonnes to 75-100k tonnes through the development of high-grade deposits. This provides investors clarity on expansion plans.
• Potential for multiple expansion - If Atalaya Mining executes on growth strategy and the copper market remains strong, its low P/E multiple of 5x could expand significantly. Comps trade between 10-15x earnings.
• Takeover potential - If copper prices rise materially, Atalaya's reserves and resources could attract takeover interest from a major mining company looking to add copper exposure.
• Underfollowed/undervalued - Limited analyst coverage and UK listing mean ATMYF is under the radar for many US investors relative to its potential. Represents a chance to get in early.

Atalaya Mining offers an attractive risk/reward profile with multiple ways to realize upside for investors through organic growth, copper market tailwinds, potential rerating, and M&A possibilities. The company's track record, jurisdiction, and valuation provide additional reasons for investment.