Today, we examine two junior mining stocks that are adapting to lower commodity prices in different ways. Sherritt is cutting costs and continues to diversify away from its previous heavy reliance on Cuba. Amerigo is expanding as it moves ahead with a new processing plant in Chile. That means both stocks should be in good position to make a strong move when commodity prices revive.
SHERRITT INTERNATIONAL (Toronto symbol S; www.sherritt.com) sold all of its coal interests for $793 million in cash in April 2014.
The company is now focused on nickel production, with operations in Cuba and Canada. As well, it has a 40% interest in the Ambatovy nickel mine on the island nation of Madagascar, off Africa’s east coast. Sherritt also produces oil and gas in Cuba, Spain and Pakistan and manages 506 megawatts of power generation capacity in Cuba.
In the three months ended March 31, 2015, the company’s revenue fell 31.4%, to $82.9 million from $120.9 million a year earlier, mostly due to lower oil and gas prices. Cash flow per share declined 32.0%, to $0.17 from $0.25.
Sherritt paid off $425 million of debt in October 2014, but its total debt of $2.0 billion is still a high 4.2 times its $472.6-million market cap. Sherritt now holds cash of $477.7 million. It has also cut about 10% of its salaried workforce.
Most of the company’s revenue and earnings come from Cuba, which adds risk. However, it’s diversifying away from that country by investing in other nations, such as Madagascar. Sherritt needs an improving global economy to fuel commodity demand, but it’s well positioned to profit when markets rebound.
Recommendation in Stock Pickers Digest: BUY for aggressive investors.
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Mining stocks: Amerigo expects Cauquenes processing plant to double its production in 2016
AMERIGO RESOURCES (Toronto symbol ARG; www.amerigoresources.com) processes copper and molybdenum from waste rock at Chile’s El Teniente, the world’s largest underground copper mine. The rock comes from the mine’s current production and tailings from the nearby Colihues deposit. This contract runs at least through 2037.
Amerigo gets 94% of its revenue by processing copper. The remaining 6% comes from molybdenum.
In the three months ended March 31, 2015, Amerigo’s copper production fell 12.7%, to 8.9 million pounds from 10.2 million a year earlier. Molybdenum output declined 21.7%, to 97,883 pounds from 125,016.
The lower production and a drop in copper prices cut the company’s cash flow to $1.2 million, or $0.006 a share, from $4.5 million, or $0.026 (all figures except share price and market cap in U.S. dollars).
Amerigo is moving ahead with plans to build a plant to process material from the Cauquenes tailings deposit, located near its current operations. This is a big growth project: the company expects it to help double its production, to 90 million pounds, in 2016.
The Cauquenes expansion will cost $140 million. However, Amerigo has used its cash flow to pay off all of its debt over the last few years, and it holds cash of $14.2 million. It also has financing in place through Chilean banks and Export Development Canada.
Copper prices have dropped to $2.47 U.S. a pound from around $3.25 in mid-2014, but the metal should rebound with the global economy.
Recommendation in Stock Pickers Digest: BUY for highly aggressive investors.
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