Atacama Minerals (TSXv: AAM) – A World Class Industrial Minerals Company

Malcolm Bucholtz B.Sc, MBA Analyst

Trading Note

Iodine - Little Talked About but Vitally Important

At The Market Traders we have a particular interest in the lesser known industrial type minerals. The next time you are in the Pharmacy section of your local Safeway or Albertson’s take a look on the shelf for Iodine. Stop for a moment and ask yourself where that Iodine came from. Would you be shocked to learn that it may have originated at a mine in a place like Chile?

Iodine is something that does not come up in everyday conversation in the office coffee room. But, it is an industrial product of vital importance. Aside from what you see in the pharmacy section, what else is Iodine used for? Well, how about as a contrast media in X-ray and MRI applications for one. In fact, this is the largest single application for Iodine taking about 20% of global production. Close behind is the area of biocides at 18%. Each time I brew a batch of home-made beer I sterilize my bottles with something called Iodophor which contains Iodine. Imagine how much of this stuff gets consumed by the big brewers at Coors and Miller as they sterilize millions of bottles every week? Other applications include human and animal nutrition, pharmaceuticals and even LCD computer and television screens.

Atacama Minerals – A Lundin Company

Atacama Minerals is a Canadian based company with a 100% interest in the Aguas Blancas iodine/sulphate/nitrate mine in northern Chile. Aguas Blancas has been in production since 2000 and Atacama has had 100% ownership of the project since 2005. One of the major shareholders in Atacama is the Lundin Group of Sweden. The mere mention of the Lundin name in mining circles is enough to make grown men tremble. Lucas Lundin is to be feared and revered for his business acumen.

Geology and Mining

The geology at the Aguas Blancas mine is connected to mineralization called “caliche”. There is still much debate surrounding the nature of these caliche deposits, which by the way are extremely rare occurrences in the world. Some argue that these deposits are 15 million years old while others argue a 4 million year age point. In any case, ancient lakes in the Atacama Desert that were subject to hyper-aridity (extreme dryness) over time have created these caliche deposits. Mining techniques are relatively straightforward and involve a thin layer of overburden being stripped away and then the mineral rich underlying caliche material being loaded in trucks that haul it to leach plant. After crushing and agitated leaching, material is sent to the iodine reduction section of the plant where Iodine, Sulfate and Nitrate are separated out. The Sulfate and Nitrate are sent to storage ponds. The resulting Iodine comes out in 99.9% pure crystalline form. The Aguas Blancas Iodine is of very high quality and is widely accepted on world markets. Global demand for Iodine is increasing at about 1000 tonnes a year or 3.5% a year.The Sulfate and Nitrate that is currently stored in ponds may soon end up being used to meet demand in the global Potassium Nitrate fertilizer market. Atacama is currently wrapping up a feasibility study to more closely examine this prospect. At present, there is quite a demand from specialty growers of tobacco, fruits and vegetables for Potassium Nitrate “natural origin” fertilizer. Demand for this type of fertilizer has been growing at 5% a year and this is growth rate is expected to continue.

Aguas Blancas Reserves & Resources

The ongoing drill program at Aguas Blancas has now increased the reserves and resources. The following table shows what has currently been identified :

Infrastructure Updates

Atacama has just recently completed some beneficial upgrades to its infrastructure. It has moved away from the slow, cumbersome heap leach methodology and has now installed a mechanized agitated leach plant. In addition, $8.6 million has now been spent to run a powerline 28 kms to the plant site. This will replace the current very expensive diesel powered generators that have been powering the operation.

Production Outlook

With the mechanized agitated leaching set to come on in full force, Atacama expects that it will be able to ramp up annual production of Iodine to 1500 tonnes. The cost savings of using this mechanized leaching will be considerable. At an annual output of 1500 tonnes, Atacama is sitting on enough Proven and Probable reserves to carry on mining for 15 years. Proving up the measured and indicated resources will further add to this life of mining operation.

Atacama – Mathematics

Atacama produced 1075 tonnes of Iodine in 2007 and sold 1095 tonnes. Revenues came in at $25.17 million which means that Iodine is selling at $23,000 per tonne on global markets. After tax income was $1.8 million. Production costs came in at $14.22/tonne. Cash flows from operations (before changes to non cash items) came in at $8.57 million. With a basic share structure of 114 million, this equates to about 7.5 cents per share. At the start of 2007, Atacama was trading at $1.00 per share or 13.3X cash flows (before changes to non cash items).

2008 should see an increase in output, a decrease in operating costs per tonne and an increase in sales revenue driven by not only this higher output but also by higher prices for Iodine. Let’s assume that Iodine prices will increase by about 4% to $24,000 and that Iodine output will be 1400 tonnes. Let’s further assume that production costs will drop by 15%. I will further assume that depreciation will come in at $4M and that Expenses will come in at $2.2M. Given these broad sweeping assumptions, the P/L statement for 2008 could look like this:

Cash Flows could look like this based on some further assumptions:

At a multiple of 13.3X cash flows, Atacama could potentially end up trading at $1.50 under all the above assumptions.

In any case, with the recent infrastructure improvements and given some assumptions as to cost savings and revenue increases, it is fair to say that Atacama most certainly has potential to move higher. Factor in the future potential for nitrate fertilizer sales and Atacama has even further potential to move higher thus making it a stock to watch.

We at The Market Traders shall be following the Atacama Minerals story closely over coming quarters. We are initiating an accumulate rating on Atacama Minerals. Use market weakness and volatility to build a position in the stock.

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