Green Gold and Artisanal Integration: The Unique Investment Case of Mineros S.A

• Mineros S.A. is a gold producing company with assets in Nicaragua and Colombia, producing between 210,000 and 230,000 ounces of gold annually.
• In Colombia, Mineros operates a large alluvial mine using environmentally friendly methods, producing 80,000-90,000 ounces of gold per year.
• In Nicaragua, Mineros produces about 130,000 ounces of gold annually, with 90,000 ounces coming from artisanal miners.
• The company has a strong financial position with $43 million in net income and $90 million in EBITDA for Q2, and a market cap of about C$300 million.
• Mineros has paid dividends for 40 of the last 42 years and is looking for organic and inorganic growth opportunities.

In the ever-evolving landscape of gold mining investments, Mineros S.A. stands out as a unique player with operations in Colombia and Nicaragua. This mid-tier gold producer offers investors an intriguing combination of sustainable mining practices, strong financials, and a compelling dividend yield. As global economic uncertainties continue to drive interest in gold, Mineros S.A. presents an opportunity for investors seeking exposure to the precious metals sector with a twist of environmental and social responsibility.

High Dividend Yield and Sustainable Mining

Mineros S.A. is a gold producing company with a current annual production range of 210,000 to 230,000 ounces of gold. The company's operations are spread across two countries, each with its own distinct mining approach and characteristics.

Colombian Operations: Green Gold Production

In Colombia, Mineros operates what it claims to be one of the largest, if not the largest, alluvial gold mines currently in operation. This operation produces approximately 80,000 to 90,000 ounces of gold annually. What sets this mine apart is its environmentally friendly approach to gold extraction.

Alan Wancier, CFO of Mineros, explains the unique aspects of their Colombian operation:

"In Colombia we have an alluvial mine. We produce roughly between 80 and 90,000 ounces of gold. Very environmentally friendly, very green. We do not mine the river, we mine on the bank of the river in a closed environment, a closed path, and hence the water that we're using to mine to dredge is not mixed with the river. We only use water and gravity, so there is no chemicals, no cyanide, nothing - just water and gravity."

This method of mining is particularly noteworthy in an industry often criticized for its environmental impact. Mineros employs a fleet of 18 dredges, including five bucket dredges, nine suction dredges, and three Brazilian-type dredges. The company's commitment to sustainability extends to its power source, with electricity for the dredges coming from their own hydroelectric plant.

Moreover, Mineros has implemented a progressive rehabilitation approach. As the mining operation moves northward along the river, the company closes and rehabilitates the previously mined areas. This practice ensures that only the current operation remains open, minimizing the long-term environmental footprint.

Nicaraguan Operations: A Unique Model of Artisanal Mining Integration

In Nicaragua, Mineros takes a different approach, producing approximately 130,000 ounces of gold annually. What makes this operation stand out is its integration of artisanal mining into its business model. Of the total production, about 90,000 ounces come from artisanal miners.

Wancier elaborates on this unique arrangement:

"In Nicaragua, it is legal. Artisanal mining is legal. In fact, any mining operation has to give at least 1% of their package land package to artisanal miners. We saw that as an opportunity and we created a model where we buy the ore from the miners. We pay them roughly 40 to 45% of spot price of gold."

This model not only provides Mineros with a cost-effective source of ore but also supports the local economy by providing a livelihood for approximately 6,000 artisanal miners. The company has implemented measures to improve the working conditions and social benefits for these miners, including life and accident insurance.

Financial Performance and Valuation

Mineros' financial performance has been robust, with the company reporting $43 million in net income and $90 million in EBITDA for the second quarter of the current fiscal year. Extrapolating these figures, the company could potentially achieve around $170-180 million in EBITDA for the full year.

Despite these strong financials, Mineros appears to be undervalued in the market. Wancier points out:

"We're currently only market cap is like C$300 million, so we are probably on the cheaper side of gold mining companies."

This valuation discrepancy could present an opportunity for investors, especially considering the company's consistent dividend payments and growth prospects.

Interview with CFO Alan Wancier

Dividend Track Record

One of Mineros' most attractive features for income-focused investors is its impressive dividend history. The company has paid dividends for 40 out of the last 42 years, with only a two-year gap in the 1990s. This consistent dividend payout positions Mineros as a "dividend aristocrat" in the mining sector, a rare designation that could appeal to investors seeking stable income from their gold investments.

Currently, the dividend yield stands at an impressive 12-13%. Wancier emphasizes that this high yield is not due to excessive payout ratios but rather the company's low valuation:

"Our dividend yield is currently 12-13%. Not because we pay too much, we have the cash to pay it, but because our valuation is so low."

Growth Strategy and Future Outlook

Looking ahead, Mineros is actively pursuing growth opportunities, both organically and through acquisitions. The company is exploring the development of an underground mine project in Nicaragua, which could complement its existing operations and provide a new avenue for production growth.

In terms of inorganic growth, Mineros is open to expanding into new geographies, potentially adding a third or fourth operating region to its portfolio. The company's management believes that its strength in obtaining and maintaining social licenses to operate in challenging jurisdictions could be a competitive advantage in pursuing these growth opportunities.

The current macroeconomic environment appears favorable for gold producers like Mineros. With geopolitical tensions and expectations of declining interest rates worldwide, the outlook for gold prices remains positive. Wancier believes that while gold prices are relatively high, there is still potential for further increases.

This positive gold price environment, combined with what Wancier perceives as an undervaluation of gold companies relative to the gold price, creates a favorable backdrop for potential mergers and acquisitions in the sector. This could benefit Mineros both as a potential acquirer and as a possible acquisition target.

Challenges and Risks

While Mineros presents an attractive investment case, it's important to consider the potential risks and challenges:

1. Political Risk: Operating in countries like Nicaragua and Colombia can expose the company to political and regulatory risks. However, Mineros has demonstrated its ability to navigate these environments successfully over many years.
2. Gold Price Volatility: As with all gold producers, Mineros' profitability is sensitive to fluctuations in gold prices. While the current outlook is positive, any significant decline in gold prices could impact the company's financial performance.
3. Operational Risks: The reliance on artisanal miners in Nicaragua introduces some operational uncertainties, although the company has managed this relationship effectively so far.
4. Environmental and Social Governance (ESG) Considerations: While Mineros emphasizes its environmentally friendly practices in Colombia, investors should continue to monitor the company's ESG performance, particularly as it relates to artisanal mining in Nicaragua.

Conclusion

Mineros S.A. offers investors a unique proposition in the gold mining sector. With its combination of environmentally friendly alluvial mining in Colombia and innovative integration of artisanal mining in Nicaragua, the company has carved out a distinctive niche. Its strong financial performance, impressive dividend history, and apparent undervaluation in the market present an intriguing opportunity for investors.

As the gold market continues to benefit from macroeconomic tailwinds, Mineros appears well-positioned to capitalize on potential growth opportunities while providing shareholders with attractive dividend income. For investors seeking exposure to gold with a focus on sustainability and consistent returns, Mineros S.A. warrants serious consideration as part of a diversified portfolio.

The Investment Thesis for Mineros S.A.

• Unique Operational Model: Mineros combines environmentally friendly alluvial mining in Colombia with a socially responsible artisanal mining model in Nicaragua, differentiating it from peers.
• Strong Financial Performance: With $43 million in net income and $90 million in EBITDA for Q2, Mineros demonstrates robust financial health.
• Attractive Dividend Yield: The company offers a 12-13% dividend yield, supported by a 40-year track record of consistent dividend payments.
• Potential Undervaluation: With a market cap of around C$300 million, Mineros appears undervalued relative to its financials and peer group.
• Growth Potential: The company is actively pursuing both organic growth through new projects and inorganic growth through potential acquisitions.
• Positive Gold Market Outlook: Macroeconomic factors support a bullish view on gold prices, potentially benefiting Mineros' future performance.
• ESG Considerations: Mineros' focus on environmentally friendly mining practices and support for artisanal miners aligns with growing investor interest in ESG factors.

Macro Thematic Analysis

The investment case for Mineros S.A. is closely tied to several key macro themes currently shaping the global economy and the gold mining industry.

Firstly, the ongoing economic uncertainties, including geopolitical tensions and inflation concerns, continue to support gold as a safe-haven asset.

As Alan Wancier, CFO of Mineros, notes: "I think gold price is high but can go higher, especially with the geopolitical issues currently in the world, especially with the interest rates that we expect to continue to go down worldwide."

This outlook suggests a potentially favourable pricing environment for gold producers like Mineros in the near to medium term.

Secondly, the growing emphasis on Environmental, Social, and Governance (ESG) factors in investment decision-making aligns well with Mineros' operational model. The company's environmentally friendly alluvial mining practices in Colombia and its socially responsible approach to artisanal mining in Nicaragua position it favourably in an industry often criticized for its environmental and social impacts.

Thirdly, the current undervaluation of gold mining companies relative to gold prices, as highlighted by Wancier, presents opportunities both for investors and for industry consolidation through mergers and acquisitions. This dynamic could benefit Mineros either as an attractive acquisition target or as a potential acquirer looking to expand its operations.

Lastly, the global focus on sustainable development and responsible resource extraction is likely to intensify, potentially giving companies like Mineros, with their focus on "green gold" and community engagement, a competitive advantage in securing new projects and maintaining their social license to operate.

Key Takeaways and Implications

Mineros S.A. presents a compelling investment case in the gold mining sector, offering a unique combination of sustainable mining practices, strong financial performance, and attractive dividend yield. The company's distinctive operational model, blending environmentally friendly alluvial mining in Colombia with a socially responsible approach to artisanal mining in Nicaragua, sets it apart from many of its peers. With a positive outlook for gold prices and potential for both organic and inorganic growth, Mineros appears well-positioned for future success. However, investors should carefully consider the political risks associated with its operating jurisdictions and monitor the sustainability of its high dividend yield. As the mining industry continues to face increased scrutiny on environmental and social issues, Mineros' approach could prove advantageous, potentially attracting investors focused on ESG considerations. Overall, for those seeking exposure to gold with a focus on income and sustainability, Mineros warrants serious consideration as part of a diversified investment portfolio.