AFMJF - Alphamin: Solid Q4 Results But Tin Demand Outlook Grim (Rating Downgrade)

2023-03-23 03:26:56 ET

Summary

• In Q4 2022, EBITDA came in at $27 million while AISC dropped below $13,500 per tonne.
• However, I think tin prices are likely to hover around $20,000 per tonne in 2023 as high inflation and rising rates are sapping demand for discretionary goods.
• In my view, Alphamin’s EBITDA is likely to be in the region of $100 million in 2023.
• I think that this could be a good time for investors to trim or close positions.

Introduction

I've written a total of six articles on SA about DR Congo-focused tin miner Alphamin Resources ( OTCPK:AFMJF ) ( AFM:CA ). The latest of them was in November and in it I said that the company was starting to look undervalued as tin prices rebounded from November lows.

Well, Alphamin recently released its financial results for Q4 2022, and I think that the quarterly EBITDA of $27 million was at a decent level considering the average tin price achieved slumped by 44.2% year on year. That being said, I'm no longer bullish on the stock as tin prices have been under pressure over the past few months due to high global inflation. In my view, 2023 could be a challenging year for Alphamin. Let's review.

Overview of the Q4 2022 financial results

In case you haven't read any of my previous articles about Alphamin, here's a quick description of the business. The company is based in Mauritius and its main asset is a 84.14% interest in the Bisie tin complex in the Walikale territory of the province of North Kivu in the DRC. The project contains the Mpama North and Mpama South deposits, and the grades at the former are about four times higher than most other operating tin mines across the world. As of June 2022, Mpama North had measured and indicated resources of 155,700 tonnes of tin at an average grade of 4.98%, Following an extensive drilling campaign in 2022, the indicated resource at Mpama South soared by 286% to 80,200 tonnes at an average grade of 2.46%.

Mpama North has an annual output of about 12,000 tonnes of tin and Alphamin is building a mine at Mpama South that is expected to boost production by about 7,200 tonnes per year. The project has an initial CAPEX of about $116 million and is expected to be completed by December. It will boost Alphamin's share of global tin production to about 6.6%. According to a preliminary economic assessment released in March 2022, the all-in sustaining costs (AISC) at Mpama South are expected to be close to the levels of Mpama North despite the much lower grade.

Turning our attention to the Q4 results for Bisie, you can see from the table below that tin production came in at 3,113 tonnes. This exceeded the market guidance of 3,000 tonnes and AISC fell by 11.1% year on year to $13,438 per tonne. Unfortunately, the main reason costs fell was low tin prices as a significant part of AISC is tied to the price of the metal. The average tin price achieved in Q4 crashed by 44.2% to $21,436 per tonne as rising prices in November and December couldn't compensate for a weak price environment in October. On a positive note, Alphamin finished December with cash and cash equivalents of $ 119.4 million, which put the net cash position at $109.3 million.

Unfortunately for Alphamin, tin prices have been falling rapidly since briefly surpassing $32,000 per tonne in late January and I don't expect them to recover anytime soon. It seems that the company's Q1 2022 financial results are likely to be underwhelming.

So, why are tin prices declining at the moment? Well, data from the International Tin Association shows that about half of global tin demand comes from soldering for electronic circuit boards.

Low tin inventories and constrained production due to Covid-19 lockdowns led to a significant price increase in the first half of 2022. However, with production ramping up and high inflation and rising interest rates reducing demand for electronic products, prices are now under pressure. According to data from the International Tin Association, tin demand is estimated to have fallen by 0.6% in 2022 due to high inflation. This is significantly below the previous forecasts for growth of 3-4%. Considering inflation rates across the world remain high and major central banks are still raising interest rates, I expect the tin market to remain challenging in 2023. In my view, the average tin price achieved by Alphamin during this year is likely to be about $20,000-$22,000 per tonne. Considering Mpama South is expected to be commissioned around December, I expect Bisie's 2023 output to stand at about 12,000 tonnes of tin which would put Alphamin's EBITDA for the year in the region of $100 million.

Overall, I think this could be a good time for investors to trim or close positions. While I believe that 2023 will be a tough year for Alphamin, short selling mining companies is dangerous as the prices of commodities are notoriously volatile. I remain optimistic about the long term prospects for Alphamin and tin demand due to rising demand from electric vehicle batteries. Considering that the International Tin Association regards $30,000 per tonne as the base price required to attract new investment in the sector, I think that it's likely demand will surpass supply over the coming years.

Looking at the risks for the bear case, potential catalysts for tin prices in 2023 include a ban on exports of tin ingots in Indonesia as well as increased competition in the tin smelting business. In addition, the closure of any major mine could send prices soaring. The most recent example was in January when tin briefly increased above $30,000 per tonne as Peruvian mining giant Minsur temporarily suspended operations at its San Rafael tin mine due to nationwide protests.

Investor takeaway

Alphamin finished 2022 on a strong note and high tin prices during the first half of the year allowed it to fund the development of Mpama South without resorting to debt. The company has a strong balance sheet and it managed to grow the resources at Bisie significantly over the past year.

However, I think that tin prices are likely to hover around $20,000 per tonne in 2023 as high inflation and rising rates are sapping demand for discretionary goods. In my view, Alphamin's EBITDA is likely to be in the region of $100 million in 2023 and this doesn't seem like a particularly good time to open a position here. In my view, it could be best for risk-averse investors to avoid this stock.

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