Copper Price Risks And Project Delays Will Drive Disappointing Long-Term Earnings

Catalysts

About Atalaya Mining Copper

Atalaya Mining Copper operates copper mines and related growth projects focused on expanding low cost production in Spain and other parts of Europe.

What are the underlying business or industry changes driving this perspective?

• The planned doubling of production to 100,000 tonnes of copper equivalent within roughly three years rests heavily on timely ramp up at San Dionisio and Masa Valverde. Any delay or underperformance in grades, recoveries or plant modifications could leave revenue growth well below what is currently implied by the project pipeline.
• Dependence on favorable copper pricing amid tightening global supply means that any faster than expected recovery at large disrupted global mines, or new capacity coming online, could compress realized prices just as Atalaya steps up capital spending, squeezing EBITDA and free cash flow.
• The Touro project is positioned as a major value driver with low capital intensity and attractive operating costs. However, permitting and water authority delays, as well as potential changes in political or regulatory priorities, could push back or scale down the project, limiting future production growth and margin expansion.
• Plans to add polymetallic and zinc recovery capacity at Riotinto and Masa Valverde rely on engineering execution and stable by product prices. Cost overruns or weaker zinc and silver markets would erode the anticipated reduction in cash costs and depress net margins.
• The E LIX plant remains technically promising but currently marginal to earnings. If engineering reviews or further optimization fail to deliver a consistently profitable flowsheet, Atalaya may either absorb ongoing fixed costs or write down part of the investment, negatively impacting future earnings and return on capital.

Assumptions

This narrative explores a more pessimistic perspective on Atalaya Mining Copper compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Atalaya Mining Copper's revenue will grow by 2.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 19.0% today to 14.3% in 3 years time.
• The bearish analysts expect earnings to reach €67.7 million (and earnings per share of €0.48) by about December 2028, down from €83.3 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €244.7 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 15.9x on those 2028 earnings, up from 14.9x today. This future PE is lower than the current PE for the CA Metals and Mining industry at 17.4x.
• The bearish analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.92%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Global copper supply is tightening at the same time as structural demand from electrification and population growth is rising by around 2% to 3% per year. Management expects outages at major producers such as Grasberg and Escondida to support structurally higher copper prices, which would directly lift Atalaya Mining Copper's revenue and earnings.
• The company is executing on a clear, funded growth pipeline that targets an increase from roughly 50,000 tonnes to 100,000 tonnes of copper equivalent within about three years through San Dionisio, Masa Valverde and polymetallic ore. This means volumes could rise substantially and support higher long term revenue and operating profit.
• Management expects the Touro project to move into construction in 2026, with strong political backing and low capital intensity of about 10,000 dollars per tonne of copper, as well as attractive operating costs that should sit around 2.50 dollars to 3 dollars per pound all in sustaining cost. This would add a long life, low cost operation that improves group margins and free cash flow.
• Unit costs are trending down, with year to date cash costs at about 2.33 dollars per pound and all in sustaining costs at 2.84 dollars per pound. These figures are supported by cost control, higher throughput and improving silver by product credits, which could sustain or expand net margins even if copper prices are volatile.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Atalaya Mining Copper is £5.05, which represents up to two standard deviations below the consensus price target of £7.94. This valuation is based on what can be assumed as the expectations of Atalaya Mining Copper's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £10.0, and the most bearish reporting a price target of just £5.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be €474.6 million, earnings will come to €67.7 million, and it would be trading on a PE ratio of 15.9x, assuming you use a discount rate of 9.9%.
  
• Given the current share price of £7.74, the analyst price target of £5.05 is 53.1% lower.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.