At a time when sophisticated mining investors have been lamenting a worldwide lack of new copper development projects – and equities with the value uplift potential that goes with them – Amerigo is closing on another significant expansion of copper output at its 100%-owned Minera Valle Central (MVC) processing plant, about 1.5 hours south of Chile's capital, Santiago, on the back of an almost limitless supply of 0.11% copper ‘dirt’ from the nearby, 112-year-old El Teniente mine.

That material, 130,000 tonnes per day of tailings, is delivered to Amerigo’s plant door by El Teniente's owner Codelco, the world’s biggest primary copper producer, under agreements running through to at least 2037. Amerigo is selling back to Codelco high-grade, low arsenic copper concentrates under a long-term contract.

A US$30 million plant expansion and upgrade to take Amerigo’s annual copper output to about 90Mlbs from the current 60-65Mlbs should be completed in 18 months. The work not only increases output, but also considerably boosts copper recoveries on ‘ore’ from an older, higher-grade El Teniente tailings source, Cauquenes.

The Cauquenes tailings deposit was created over the period 1936 to 1977, with processing technology not as advanced then as it is now. The mined ore grade was also higher and the rock itself, located physically higher up in the deposit, had different mineralogy with more secondary copper minerals such as chalcocite.

The upshot of all that is the Cauquenes tailings grade at 0.27% Cu is more than double that of fresh tailings and the favourable mineralogy contributes to superior modern recovery rates.

That Cauquenes feedstock and the fresh tailings, combined with better plant economies and overall recoveries, will have a material impact on Amerigo’s revenues and operating cash flow in a strengthening copper price environment.

“Amerigo is very leveraged to the copper price and we are well positioned to benefit as the next wave in the copper price cycle is about to take off,” company CEO Rob Henderson says.

“I think based on our 2016 production metrics, our share price has caught up with our peers over the last four months. However, I don’t believe we have been given full credit for our upcoming expansion to 87 million pounds. This will increase our revenue by 53% and add US$0.2/lb Cu to our margin.”

Portents of what’s to come came in Amerigo’s recent 2016 financial reports which showed the company earned US$3 million in the December quarter on US$7 million of operating cash flow, shifting into positive earnings territory after earlier significant investment in infrastructure (to take 60,000 tonnes per day of Cauquenes high-grade tailings into MVC's plant) and a year of production growth.

Last year’s output of 56.8Mlbs of copper was 52% higher than in 2015. Amerigo generated annual net revenue of US$91.4 million, and operating cash flow before changes in working capital of US$9.6 million. At year-end 2016 it had a US$15.9 million cash balance.

“The increase in copper price and the good production from the high-grade historic Cauquenes deposit are starting to translate into positive earnings performance,” Henderson says.

“We just had a record year of production. The upcoming plant changes and higher-grade tailings coming from Cauquenes will see us get better returns from higher production.

“We were essentially cash neutral for the first three quarters of 2016, before copper went up to US$2.47/lb and we made earnings of US$3 million. Today at copper prices of $2.60-2.70 we’re in a very good position to generate stronger financial results and operating cash flow.

“We remain focused on reducing costs, improving liquidity and delivering against our targets to build value.”

From a current US$1.60-1.75/lb cash cost and US$2.30/lb all-in cost base, Amerigo is aiming for AISC around US$2.10/lb at the targeted 87-90Mlbs/year production rate.

A simple calculation puts Amerigo’s free cash flow generation at more than US$15 million a year with copper around $2.60/lb, at current production rates. At 90Mlbs/year that potentially grows significantly, before higher copper prices kick in.

“We have a contract to 2037 and we plan to make 90Mlbs of copper per year,” Henderson says.

“If this was a conventional 30,000tpd hard rock porphyry openpit with a SAG mill copper recovery of 85% then grade could be back calculated to be 0.46% Cu. Reserves would have to be 200Mt at 0.46% Cu.

“But to achieve a cash cost of US$1.40/lb [$12/tonne] the in-ground deposit would have to have some major cost advantage – such as very cheap power.

“Every mine in the world has tailings but only a few are economical to process. Having a large tailings volume is important, then the tailings location, grade and recovery parameters have to be correct.  Finally the tailings owner/operator has to be interested in entering into a deal with us to build and operate the plant.”

Codelco gets a  royalty from MVC based on production volume and the LME copper price.

The El Teniente mine also receives physical copper concentrate – which will be equivalent to about 10% of its production when the MVC expansion is complete. In short, Codelco gets revenue and production today from material that is not an asset on its books.

Amerigo restarted molybdenum production in 2016 and plans to produce about 1.5Mlbs this year.  With a US$7/lb moly price, its margin is in the order of US$2/lb, so moly will bring in an extra US$3 million or so this year.

“Moly is an interesting by-product, but unless the moly price rises substantially Amerigo’s main story will continue to be copper,” Henderson says.

The company is working on detailed engineering design for the MVC plant upgrade and has enquiries out on long-lead equipment it expects to order as soon as new loan funds are available. Amerigo has borrowed from the Spanish bank BBVA and from Export Development Canada previously and is currently working with them to arrange a $30 million facility to fund the plant upgrade.

Amerigo has a long history of successfully operating in Chile, generally regarded as one of the world’s safest and most appealing mining jurisdictions.

MVC has been producing copper in Chile for 25 years and was acquired by Amerigo in 2003. Amerigo started paying dividends two years later and has paid out $47 million in past dividends.

Henderson says the company maintains a policy of returning one-third of earnings to shareholders, and adds: “I do believe we are back in positive earnings territory, and we will be back again in dividend paying mode again.”

Henderson and Amerigo’s board and senior management team, who are obviously well connected in South America, also keep a watchful eye out for potential new opportunities.

“We are currently focussed on completing the Cauquenes expansion project on time and on budget,” he says.

“However, we have been and will continue to look at other tailings opportunities in Chile and elsewhere.”