The established copper producer and developer of multiple mines, including the Tritton project in New South Wales, has been active on all fronts in 2017/2018.
From optimising existing mines and bringing greenfield projects on stream to progressing what could be one of Australia’s most prominent copper-gold projects, it’s exciting times at Aeris.
Debt and capital restructure
The company is also looking more financially robust than it has for some time, courtesy of a debt and capital restructure finalised in March.
This involved the finalisation of the restructuring of the senior debt, convertible preference shares and cancellation of the price participation agreement.
All of these initiatives are value-accretive, providing a key platform to achieving a sustainable, long-term financial structure.
Based on 2018 projections, Aeris will have reduced debt from US$136 million to US$49 million over the last five years, a notable achievement for a relatively small company.
Restructure could lead to rerating
The restructure could see the company finally valued in line with its production and earnings profile.
Aeris executive chairman Andre Labuschagne executive chairman said: “This is the best position the company has been in for the last five years.
“With debt reduced, potential shareholder dilution reversed and the capital structure simplified, the company is now positioned to attract renewed interest from quality investors.
“This should see the company trade on a normalised basis, reflective of its fundamental value and growth prospects.”
Production and revenues belie market capitalisation
When weighing up Aeris’ production and revenue metrics against its market capitalisation of about $40 million, the company appears to be substantially undervalued.
In the first half of fiscal 2018 Aeris generated about $105 million in revenues from the sale of 12,227 tonnes of copper in concentrate.
The gross profit was $11.2 million, but the bottom line reflected a loss due to onerous finance expenses, an issue which the restructure will serve to address.
Uptick in second half production
It is worth bearing in mind that management’s fiscal 2018 copper production guidance of 27,000 tonnes implies second-half production of about 14,800 tonnes.
This represents an increase of about 20% compared with the first half, indicating that the company is poised to deliver a strong top-line performance.
As analysts run the ruler across the company’s full-year financial performance and factor in the long-term benefits of the debt restructure, Aeris could be seen in a different light.
It should become glaringly obvious that a company with a market capitalisation of $40 million that is generating in excess of $200 million a year from the production of 27,000 tonnes of copper is undervalued.
Hedging program provides increased predictability
Along with the initiatives that have paved the way for stable production and measured growth at Tritton, management has negotiated a hedging program, locking some production in at the historically high copper price.
Management’s recent decision to enter into a copper hedging program has dispensed with uncertainty surrounding fluctuating commodity prices.
In March, Aeris’ subsidiary, Tritton Resources Pty Ltd, entered into a swap contract of 12,000 copper tonnes at an average price of A$8,670 per tonne with scheduled deliveries of 1,000 copper tonnes per month out to February 2019.
The swap contract also provides Tritton with the opportunity to participate in the upside of the same schedule above an average price of A$10,170 per tonne.
While the average price is about $300 shy of the current spot price, step back 12 months to the day and the spot price was $7,640 based on the prevailing USD:AUD exchange rate of 75.2 cents.
Aeris can now focus on Lake Torrens
Operational improvements, the introduction of new producing mines to feed Tritton, refinancing and the implementation of a hedging program have provided certainty.
These combined developments provide the financial footing and cash flow predictability that the company needs as it prepares to potentially enter a new phase of growth.
This would involve development of the Lake Torrens project, a potential company maker.
Another Olympic Dam?
Aeris had to fend off appeals by three groups who were attempting to derail the highly prospective Lake Torrens project in South Australia.
READ: Aeris Resources has potential to strengthen its copper portfolio following go-ahead for Lake Torrens
Progressing such a project will be capital intensive, but there would be few smaller companies with Aeris’ balance sheet strength and predictable cash flow.
While bringing such a project into production would be a mammoth task, with cash and receivables of about $25 million Aeris can mount an aggressive exploration campaign.
Share price catalysts
Positive news on the exploration front would likely see others come to the party to reduce Aeris’ upfront capital costs.
This could be in the form of offtake agreements, farm-ins, joint ventures or even takeovers by major players if the project does shape up as a large, long life IOCG project.
Consequently, investors should follow the upcoming exploration program closely.
Will Aeris get on the front foot at Lake Torrens?
There could also be corporate activity instigated by Aeris, as management recently indicated that it would consider acquisitions.
Does this place the $30 million Argonaut Resources in the frame, or perhaps simply the acquisition of its 30% stake?
More likely the latter, as Argonaut’s interests in an early stage Zambian copper-cobalt project, nor its Higginsville gold and nickel prospects appear to be a strategic fit.
However, for ownership of projects often translates into investors attributing fair value, suggesting an offer to take full ownership of Lake Torrens isn’t out of the question.
Such a transaction would also make for a cleaner takeover should suitors see value in owning the project.