Orosur Mining — Update 19 January 2016

Orosur Mining — Update 19 January 2016

Orosur Mining

Lord Ashbourne

Written by

Lord Ashbourne

Director of Content, Mining

Orosur Mining

Cost cutting supports AISC at/below US$1,000/oz

Q216 results

Metals & mining

20 January 2016

Price

5.5p

Market cap

£5m

US$/£:1.43

Net cash (US$m)

1.8

Shares in issue

96.6m

Free float

86%

Code

OMI

Primary exchange

TSX

Secondary exchange

AIM

Share price performance

%

1m

3m

12m

Abs

(6.4)

(10.2)

(51.1)

Rel (local)

(3.0)

(3.5)

(46.4)

52-week high/low

C$12.50

C$4.88

Business description

Orosur Mining owns (100%) and operates its San Gregorio gold mine in Uruguay. It also explores for gold close to San Gregorio and further afield in Chile, at the Anillo gold property. It also owns 100% of the newly acquired and highly prospective high-grade Anzá gold property in Colombia.

Next events

Q316 results

April 2016

FY16 5esults

August 2016

Analysts

Tom Hayes

+44 (0)20 3077 5725

Charles Gibson

+44 (0)20 3077 5724

Orosur Mining is a research client of Edison Investment Research Limited

With wide-ranging material cost-cutting initiatives completed or underway (including government suspension of royalties for one year) and gold production ahead of target, Orosur is well positioned to return to profitability during H216. San Gregorio (SG) Deeps is advancing through permitting, and de-watering of the pit has been completed to allow for extraction of an initial 1,500oz and also preliminary underground development works. While profitable production and cost cutting at SG remains the key focus, Orosur is investigating potential third-party opportunities to develop and or complement its non-core assets within Uruguay and Columbia.

Year end

Revenue (US$m)

PBT*
(US$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

05/14

80.4

4.5

6.6

0.0

1.2

N/A

05/15

65.9

(6.2)

(56.3)

0.0

N/A

N/A

05/16e

41.2

0.6

0.3

0.0

25.4

N/A

05/17e

52.2

12.7

9.9

0.0

0.8

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Cash costs and AISC down by c US$100/oz

SG produced 8,172oz in Q216, a 34% decrease on Q116’s production of 12,471oz. Gold production was achieved at cash operating costs of US$858/oz, a 10% reduction q-o-q (Q216: US$954/oz). All-in sustaining costs (AISC) reduced 6.0% from US$1,166/oz to US$1,095/oz. Further cost cutting is due, which we understand from discussions with management should support AISC reducing to at or below US$1,000/oz for H216 and the potential for further unit cost reductions linked to mining higher grade ore at SG Deeps during FY17.

Safe haven demand for gold ETFs improves

Notwithstanding improving costs of production, profitability hinges on the gold price maintaining or improving from its current levels. An early 2016 rally in the gold price reached a level above US$1,100/oz and gold ETF inflows have also seen an increase for the first time since August 2015.

Valuation: Maintained due to cost reductions

We have revised our valuation and forecasts to reflect Q1 and Q2 2016 results. We maintain our production profile such that production ramps up to 41koz in FY17 and FY18, reaching c 51koz of gold in FY19 and FY20. This production profile will be revised as Orosur completes optimisation studies on its mining projects at SG and is currently the main risk to our base case valuation. On this basis and using a 10% discount rate to reflect general equity risk and gold prices as per our September 2015 Outlook note, we maintain our tentative value of Orosur’s shares at £0.28. At flat gold prices of US$1,000/oz and US$1,200/oz, this valuation becomes £0.05 and £0.18 respectively. We forecast Orosur will turn a small net profit at end FY16 of US$0.3m driven by it cutting costs and achieving 35koz of gold production sold at an average FY16 gold price of US$1,086/oz.

Production guidance maintained despite cost cutting

It is notable that while the gold price has decreased 4.2% q-o-q, Orosur’s gross profit has remained at or around break even. This demonstrates the company’s ongoing ability to reduce expenditures as well as maintaining its FY16 production guidance of 30-35koz. On 1 December 2015 Orosur announced a broad swathe of additional cost-cutting measures, comprising reductions in pay and in the workforce, and a reorganisation and streamlining of its management team. Further, the support of the Uruguayan government towards the country’s only operating mine was shown in it waiving royalty payments altogether, for one year. In total, these measures are expected to save Orosur c US$2.0m (with the 3% government royalty calculated at a gold price of US$1,100/oz) in FY16.

Development works underway at SG to access UG resources

Two main development projects are underway at SG. The SG Deeps project is progressing through permitting, with a preliminary permit awarded by the Uruguayan environmental authorities in Q116, and the mining permit being applied for with the local mining authority. While permitting is finalised, Orosur has de-watered the historical SG open pit (this being the original open pit for the SG gold mine). With the pit de-watered, Orosur will extract an initial 1,500oz of gold from the bottom of the historic pit before undertaking preliminary underground (UG) development works, which will comprise connecting the main pit ramp with the designed portal to the underground phase. Material excavated to complete these works carries a grade of between 2g/t and 5g/t (based on limited sampling).

The SG Deeps project is planned to enter its main production phase during Q117 and provide the majority of FY17 gold production.

The second development project is the testing of an extension to the existing Arenal Deeps underground mine. Arenal Deeps has provided the majority of gold production at SG and its structure and geology is therefore well known. The deposit is known to pinch and swell and this knowledge underpins the current scope of works. To complete the investigation of the down-dip extension of Arenal Deeps, a 90m-long tunnel has been driven to provide for suitable drill positions, a standard exercise in underground mines. A 1,100m drill campaign was initiated on 15 December 2015 and is expected to be completed by April 2016.

If an appropriately sized gold resource is defined down-dip of the current Arenal Deeps workings, Orosur intends to develop on to it during FY17.

Chilean greenfield exploration ongoing at no cost to Orosur

Orosur’s Anillo project JV partner, Asset Chile (AC), is solely funding the exploration of the project. Under the terms of the November 2014 non-binding farm-in contract, AC is required to provide a decision to Orosur about whether it will initiate tranche two funding totalling US$1.2m by end FY16. While information on the potential for Anillo to mirror that of the world-class projects located nearby (see below) is not yet conclusive, the fact that Orosur is managing to stay active in greenfield exploration at no cost to its own balance sheet is a clear advantage when most of the precious metals miners are significantly decreasing or stopping exploration. Exploration activities will also be married to current and longer-term market conditions/projections, which will likely mean that the resource definition will result in a more robust estimate of in-situ metal content than was achieved during the boom years (resource and reserves estimates have been continually written down in parallel with decreasing metal prices). With global gold production thought to have peaked for the current commodity cycle, the paring back in global exploration spend ultimately leads to an increasingly under-capitalised precious metals sector. Such a situation only provides support to maintaining exploration activities wherever possible.

Anillo sits within Region 2 of Chile, an area host to world-class precious metals mines including Yamana’s (NYSE:AUY) El Peñon underground gold-silver mine, which operates on a cash-cost basis of US$676/oz Au and US$8.39/oz Ag (30 October 2015 Yamana presentation). El Penon, at 31 December 2014, had proven and probable reserves of 1.7Moz of gold and 58.1Moz of silver.

A detailed description of the Anillo Project, commitments and timelines are provided on page 6 of our September Outlook note.

Development of non-core assets being looked into

As an indication that Orosur’s management is not just content with producing gold at SG, it is also actively looking into how to progress its assets outside of the Isla Cristalina belt (on which the SG gold mine is situated) and also within Columbia. At this stage no capital has been allocated and assessment is purely conceptual in nature.

Orosur’s management states that for its non-core (to operations at SG) assets outside the Isla Cristalina belt in Uruguay, it may consider agreeing deals whereby third parties are brought in to develop ore reserves of small volumes but high-grade for treatment at the SG processing plant. This would provide cash flow to Orosur without having to incur costly exploration expenditures or capex. However, we highlight that the company would need to structure deals so as not to negatively affect its unit cost base.

Its Columbian asset Anza is highly prospective for high-grade narrow veined gold and minor base metal deposits. Orosur is investigating how to progress this asset and envisages any such development would incur very low capex with a very quick pay-back period.

Sprott ETF holdings increase first time since August 2015

The Sprott managed SPDR Gold ETF constitutes (as of 14 January 2016) 44.1% of the total known ETF gold holdings recorded by Bloomberg. As such, the Sprott ETF is an important measure of capital investment into this asset type. Significantly, holdings in this ETF increased 3.1% month-on-month at 14 January 2016, with 624,591oz of gold added. This is the first such increase in this fund since August 2015. Continued investment into gold-backed ETFs will only serve to provide support to the gold price and bolster gold’s image as a safe-haven investment.

Valuation

Our valuation is maintained at £0.28 per share on incorporating H1 results. We have maintained our production profile (ramping to 41koz gold in FY17/FY18 and 51koz in FY19/FY20) but note that the key risk to our valuation lies in any revision to this as Orosur completes optimisation studies on its mining projects at SG. We have slightly adjusted our gold price assumption to reflect December’s actual average gold price of US$1,068/oz (previously US$1,164/oz), we retain all other gold price assumptions as per our September 2015 Outlook note.

For guidance on end FY16 and FY17 net cash positions at US$1,050/oz and US$1,100/oz gold prices, please see the financials section below.

Financials

Orosur’s end Q216 cash position was US$2.6m, a reduction of US$2.0m from its end Q116 cash balance of US$4.6m and relates to normal operational expenditures paired with a falling gold price during H116. We forecast that as long as the gold price is maintained at around current levels, based on production costs and expenditures (see below), then the company should finish FY16 with cash of US$2.7m.

Further, from our discussions with management we highlight that during H216:

All-in-sustaining costs of production are expected to stabilise slightly below US$1,100/oz for the remainder of FY16.

Development capex should be at a similar level to H116, that is, c US$1.8m for an end FY16 total of US$3.5m.

Exploration expenditures should also mirror H116’s of US$1.6m leading to our end FY16 total of US$3.2m.

No further restructuring costs (associated with Orosur’s reduction in workforce) are envisaged

With Pantanillo already fully impaired in FY15, the company sees no further material impairments. Some further small impairments relating to exploration expenditures may occur and will be dependent on the gold price.

Our end FY16 and FY17 estimated net cash positions based on our house gold price deck are US$2.7m and US$13.5m respectively. Using a flat gold price of US$1,050/oz these become US$2.5m and US$8.5m, and at a flat gold price of US$1,100/oz become US$2.7m and US$10.0m respectively. These projections are based on gold production in FY16 of 35koz (the upper end of the 30-35koz production guidance, which now looks eminently achievable based on gold production year to date) rising to 41koz (plus immaterial amounts of silver of c 48koz) in FY17. Note that the FY17 production figure is our estimate and we await management’s guidance on this post FY16 year end.

Exhibit 1: Financial summary

US$'000s

2013

2014

2015

2016e

2017e

31-May

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

105,884

80,370

65,868

41,156

52,226

Cost of Sales

(97,657)

(72,905)

(69,715)

(44,474)

(48,492)

Gross Profit

8,227

7,465

(3,847)

(3,317)

3,734

EBITDA

 

 

22,663

23,935

10,708

7,536

23,940

Operating Profit (before amort. and except.)

2,951

5,197

(5,861)

536

12,647

Intangible Amortisation

0

0

0

0

0

Exceptionals

(18,339)

(869)

(43,164)

(22)

0

Other

0

0

0

0

0

Operating Profit

(15,388)

4,328

(49,025)

514

12,647

Net Interest

(253)

(666)

(376)

66

54

Profit Before Tax (norm)

 

 

2,698

4,531

(6,237)

602

12,700

Profit Before Tax (FRS 3)

 

 

(15,641)

3,662

(49,401)

580

12,700

Tax

816

1,461

(4,975)

(318)

(3,175)

Profit After Tax (norm)

(14,825)

5,123

(54,376)

261

9,525

Profit After Tax (FRS 3)

(14,825)

5,123

(54,376)

261

9,525

Average Number of Shares Outstanding (m)

78.1

78.1

96.6

96.6

96.6

EPS - normalised (c)

 

 

(19.0)

6.6

(56.3)

0.3

9.9

EPS - normalised fully diluted (c)

 

 

(19.0)

6.6

(56.3)

0.3

9.9

EPS - (IFRS) (c)

 

 

(19.0)

6.6

(56.3)

0.3

9.9

Dividend per share (p)

0.0

0.0

0.0

0.0

0.0

Gross Margin (%)

7.8

9.3

-5.8

-8.1

7.1

EBITDA Margin (%)

21.4

29.8

16.3

18.3

45.8

Operating Margin (before GW and except.) (%)

2.8

6.5

-8.9

1.3

24.2

BALANCE SHEET

Fixed Assets

 

 

84,644

79,278

34,992

34,730

32,026

Intangible Assets

37,323

41,955

18,330

21,552

24,796

Tangible Assets

47,321

37,323

16,662

13,178

7,230

Investments

0

0

0

0

0

Current Assets

 

 

25,124

28,410

20,925

7,815

20,021

Stocks

15,715

14,254

14,362

3,430

4,352

Debtors

3,776

3,338

1,775

1,709

2,169

Cash

5,633

10,818

4,788

2,676

13,500

Other

0

0

0

0

0

Current Liabilities

 

 

(20,837)

(17,919)

(15,073)

(3,192)

(3,169)

Creditors

(16,665)

(13,941)

(13,944)

(3,192)

(3,169)

Short term borrowings

(4,172)

(3,978)

(1,129)

0

0

Long Term Liabilities

 

 

(10,971)

(6,789)

(6,958)

(6,606)

(6,606)

Long term borrowings

(4,823)

(961)

(352)

0

0

Other long term liabilities

(6,148)

(5,828)

(6,606)

(6,606)

(6,606)

Net Assets

 

 

77,960

82,980

33,886

32,747

42,272

CASH FLOW

Operating Cash Flow

 

 

21,485

22,767

11,753

6,321

19,360

Net Interest

(253)

(666)

(376)

66

54

Tax

0

0

0

0

0

Capex

(30,325)

(13,062)

(12,835)

(7,077)

(8,589)

Acquisitions/disposals

0

0

0

0

0

Financing

70

0

0

0

0

Dividends

0

0

0

0

0

Net Cash Flow

(9,023)

9,039

(1,458)

(690)

10,824

Opening net debt/(cash)

 

 

(5,238)

3,362

(5,879)

(3,307)

(2,676)

HP finance leases initiated

0

0

0

0

0

Other

423

202

(1,114)

59

0

Closing net debt/(cash)

 

 

3,362

(5,879)

(3,307)

(2,676)

(13,500)

Source: Company accounts and Edison Investment Research

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority (www.fsa.gov.uk/register/firmBasicDetails.do?sid=181584). Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Orosur Mining and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2016. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Biotie Therapies — Update 19 January 2016

Biotie Therapies

Continue Reading

Subscribe to Edison

Get access to the very latest content matched to your personal investment style.

Sign up for free