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Signum Research

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Joaquín Sánchez

Joaquin Sanchez, CFA
16.nov.17

Signum Perspective

COMPAÑÍA MINERA AUTLÁN, S.A.B. DE C.V.

We recently participated in the committee of Asociación Mexicana de Intermediarios Bursátiles (AMIB) and updated out outlook for Compañía Minera Autlán (AUTLAN). The company has displayed strong earnings growth year to date and maintains an accelerated pace of revenue generation and solid growth rates in terms of operating flows driven by the current price environment at the mining and ferro alloys division along with significant operating efficiencies. 3Q17 results were good showing quarterly sales growth of +73.6% YoY and EBITDA growth of +181.4% YoY.

The EBITDA margin was above 30%, a record high for the company. However, for coming quarters their estimated growth range is 20-25%.

It is important to bear in mind that the industrial commodity cycle, including both ferro alloys and steel, has been driving this growth since the end of 2016 along with investment by AUTLAN in electricity supply, which represented around 28% of the total cost of production in Q217, up from 30% in previous quarters.

Management said these efficiencies may continue to be recorded in the short and medium terms based on new electricity contracts with third parties (like Iberdrola) in which AUTLAN won lower tariffs than the ones offered by Comisión Federal de Electricidad. AUTLAN will begin work on the construction of a wind power plant in the first half of 2018, which is set to increase its own energy supply which currently accounts for 30% of its total energy needs rising to 70% in 2020.

AUTLAN’s sales are all in dollars while 70% of costs and operating expenses are in pesos, so peso depreciation would favor the company financially. Therefore, assuming mineral and ferro alloy price stability next year, the company estimates that operating income could remain at levels similar to 2018.

The company’s capital structure remains healthy. Leverage measured as Net Debt to EBITDA was below 0.6x, which is low for the industry. AUTLAN does not expect any significant changes to the upside in debt from energy investments pending execution. Current debt is 100% peso denominated.

It is also important to mention that AUTLAN’s EV/EBITDA multiple of below 4.0x, makes it one of the most appealing stocks on the Mexican Stock Exchange based on that metric.

Regarding the renegotiation of NAFTA, AUTLAN mentioned that it would not be affected by the withdrawal of a member country. It emphasized that the US market has a manganese shortage, one of AUTLAN’s main products and an important input in the manufacture of ferro alloys and steel. However, in the event of an aggressive trade or tariff scenario, the company has already explored South American markets it could penetrate in the short term.

Risks include strong volatility in industrial commodities from external impacts such as structural changes in China (main steel producer), and changes to infrastructure policies in the US, a market Autlan is highly focused on.

The local outlook for the steel industry is a production deficit in steel consumption. Aggressive imports from China are preventing adequate domestic investment in production assets which has resulted in a supply lag in recent years. We believe this scenario could favor AUTLAN in the short and medium terms due to potential demand for its products.

We remain upbeat about the stock. We reiterate our BUY rating with an end Q418 target price of P$23.50 per share.



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