Disclosure: The following represents my opinions only. I am not receiving any compensation for writing this article, nor does Hydra Capital have any business relationship with companies mentioned in this post. I am long ORO.V (Image credit to Ray Hennessey on Unsplash)
Back in April, I wrote a note (link to it here) about New Oroperu Resources (ORO.V, last at $2.90). Oroperu is one of those stories that most people never hear about… and it is one that has tested the patience of all of those who have come across it. But today, December 31, 2020, is a unique day for New Oroperu because this is the day that Barrick (ABX.TO, last at $28.98) has to make a decision regarding its option agreement on ORO’s wholly owned, 3.2 million ounce, Tres Cruces gold deposit in Peru.
Seventeen years ago (yes, seventeen years) New Oroperu gave Barrick an option to earn a 70% interest in the Tres Cruces property in exchange for Barrick ultimately putting the deposit into production. In the simplest terms, if Barrick met its obligations under the deal, ORO would retain a 30% interest in the Tres Cruces deposit, carried to production (i.e., no capital to raise to fund it) plus a 2% NSR on the whole deposit. Given that the Tres Cruces resource weighs in at 2.6 million ounces of measured-plus-indicated gold, plus another 0.6 million ounces of inferred, if Barrick exercised its option, ORO would have nearly a million ounces of gold (0.96 million ounces) net to its interest, funded through to production. That’s a very unique situation, and is something that I think the market will notice should it come to pass. Ounces-in-the-ground valuations on undeveloped deposits in the middle of nowhere are one thing, but ounces-funded-to-production usually transact/are valued at “many hundreds” of dollars per ounce; so the leverage ORO has is clear. Meanwhile, there are a lot of buyers for 30% passive interests in Barrick-pedigree mines, with a 2% NSR cherry on top.
Recall that the thing that makes Tres Cruces so unique is its proximity to Barrick’s Lagunas Norte mine, which is on care and maintenance because it has run out of oxide ore. As chance would have it, ORO’s Tres Cruces deposit has a low-strip oxide cap that my guesstimates peg in the 0.3-0.5 million ounce range. Hmmmmm…. how interesting. Lagunas needs oxide ore to get it up and running again and Tres Cruces has near surface oxides just 10 kilometres away. That to me seems like a about as plain vanilla of a “satellite deposit” as you can find. If that’s not plainly evident already, Barrick’s own technical report on Lagunas Norte considers Tres Cruces as a satellite deposit, as you can read by following this link. The Tres Cruces oxide ounces alone could be expected to have US$1000/oz margins at a US$1500 gold price. The free cash flow from those oxides would likely fund the development of the underlying sulphides for the greater 20+ year sulphide project. It’s like a lock and key, and is a development strategy used many times before; because it works.
Given Barrick CEO Mark Bristow’s corporate culture and stated principles of coming up with creative solutions to problems — and giving non-core assets new life under new teams with comprehensive paths to value creation — I feel good about where ORO sits. As the CEO of Barrick, Bristow is, to a large degree, a veritable Kingmaker when it comes to asset divestitures and combinations, so here’s hoping he sees what I do here. I’m honestly not sure which way the chips will fall as the clock ticks midnight tonight… and I’m honestly not even sure which outcome I would prefer to see. Do I want ORO to have a 30% interest and a 2% NSR carried to production if Barrick exercises its option? Or would I rather own 100% of the deposit and see ORO deal directly with whoever buys Lagunas from Barrick? Or would I rather see ORO pull together a deal to take on the whole shooting match itself, with some new bodies of course, like other deals I’ve seen where 1+1=3? I think those are all viable alternatives based on different deals I’ve seen in the market over the years.
With about 12 hours to midnight, I shouldn’t have to wait much longer to start seeing some movement on this file. This story has sat on the shelf for a looooong time, but I bet that it will be topical in Q1 2021 given the scale of the combined operation. For perspective, if Tres Cruces and Lagunas Norte were put together, the combined asset would be comparable to that of a name like Orla Mining (OLA.TO, last at $6.88) in terms of resource scale and composition… and Orla’s market cap is about CDN$1.6 billion. ORO’s market cap is about CDN$75 million.
Clearly, it’s my opinion that if Barrick brings the cheese and ORO brings the wine, the two could have quite a party together. I guess we’ll see.