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 and PRYM.V (Image credit to Thomas Kinto on Unsplash)
I’m short on time this morning, but I just finished reading through a resource update from New Oroperu (ORO.V, last at $2.32) that I’ve been looking forward to for some time… and it was a good read. Last June, the company had mentioned that it was breaking out the oxide component of its Tres Cruces gold resource as a way to quantify what the “starter pit” of this deposit looks like. The starter pit was to encompass resource ounces that can be recovered with a simple heap leach operation (like the one that Barrick was running at its nearby Lagunas Norte mine (7 to 8 miles away) before it was put on care and maintenance for lack of oxide ore that it could process). At this point, it’s important to understand that quality oxide gold deposits are sought after by miners because of their low-capex, low op-cost, and relative simplicity. You blast/dig, haul, crush, and spread the crushed ore on a leach pad; that’s it in a nutshell. The required equipment is both simple and inexpensive, and operating margins can be very high. Coming back to New Oroperu, with the numbers released this morning, whether these leachable ounces at Tres Cruces 1) go through Lagunas Norte as part of a greater “Lagunas Reboot” plan, or 2) are developed as a stand-alone development, is not what’s on my mind today — that’ll sort itself out over time. What is on my mind is the potential value of the ounces on the table in the shallow, high-grade, leachable ore. Those leachable ounces are like pouring jet fuel on wood if you’re trying to start a fire (i.e., build a mine). Look no further than the history of Alacer Gold (ASR.TO, recent merged with SSR Mining) to see how oxide ounces can jumpstart a much bigger operation if desired… or Orla Mining (OLA.TO, last at $5.52)… or Prime Mining (PRYM.V, last at $2.50). As a friend of mine likes to say, “Just sayin’…”
So what are the numbers? New Oroperu reported a resource of 9,636,000 tonnes grading 1.37 g/t Au (425,000 ounces) in leachable oxides. It also reported a leachable-sulphide “bonus” of 5,707,000 tonnes grading 1.12 g/t Au (205,000 ounces). That adds up to 630,000 ounces of leachable gold resource (that’s already getting up there in the comp tables)… and the grades are impressive. When it comes to oxide development projects, Tres Cruces would be considered “high-grade”; but don’t just take my word for it, flip to slide 19 of this Prime Mining presentation to see how New Oroperu stacks up on their grade chart for existing oxide deposits (hint: only one other operation on their chart would have better grade). That grade translates to US$70-80/tonne of rock based on a US$1600-1800/oz gold price. Operating costs (mining + processing) on the heap-leachable resource should be in the realm of $10/tonne. If I use the expected 80-85% recovery factor for the oxides (and 65% for leachable sulphide), the operating margin should ballpark in the range of US$50-60/tonne. If you run the numbers, it’s easy to see how operating costs could come in well below US$500 per ounce, so I’m going to stick with my prior ball-parked US$1000/oz operating margin estimate, which makes the math really, really easy.
At this point I can basically make a ledger of the deposit as I see it. On the credit side, undiscounted, I think the gold ounces represent something like US$480 million of operating margin (i.e, US$1000/oz margins on recovered ounces) at US$1500 gold. This is due to the low-cost nature of oxide gold production noted above. On the debit side, I’m going to take a stab and say that, as a standalone, capex for a 4,000-5,000 tonne/day heap leach operation might come in in the US$50-75 million range. That’s a real guess and depends on a variety of factors (e.g., new vs used equipment, pre-strip capex, plant sizing/production rate, etc), but I’ll use the high end for this math and then round it to US$80mm just to make the numbers easy. That leaves roughly US$400 million of undiscounted operating margin on the table, net of capex, at US$1500 gold. Keep in mind that as of Friday’s close, ORO’s market cap was just CDN$60 million. Hmmmm… That’s a huge pile of cash trading for cheap and a rare animal in a market that’s been picked over for assets like this for the better part of two decades.
Tres Cruces has been forgotten on the shelf like an antique gold lamp in a pawn shop, but this resource update should look like a flare in the night sky to those paying attention. Whether the leachable ounces go through the existing operation at Lagunas or a stand-alone operation at Tres Cruces is essentially a trade-off study between 1) higher operating costs and minimal capex (if ore is trucked to Lagunas), and 2) lower operating costs, but full capex (if developed as a standalone). To summarize, from Barrick’s viewpoint (or whoever buys Lagunas), Tres Cruces looks like a very-low-capex, high-margin satellite deposit. Through the eyes of a standalone developer, Tres Cruces looks like a low-capex, high-margin standalone project. Either scenario looks pretty good to me. I’m not sure when or if the market will see what I do, but I spend a lot of time looking at gold developers and producers and ORO stands out to me as having the potential triple-threat of low production costs, low capex, and optionality.
I’m running out of time, but wanted to touch on the optionality here. Everything I’ve discussed here is based solely on the oxide and leachable sulphide ounces, but there’s a huge refractory sulphide resource below that (~1.8-1.9 million ounces), some of which is very high grade. The Tres Cruces deposit is open to depth with virtually untested feeder zones that could add to the resource even further over time. I think the bigger question for ORO, or whoever might acquire it, is not whether or not the initial heap leach project would be a good one, but what to do with the free cash flow that it would spin off. If you were to reinvest the free cash flow from a future heap leach operation into the development of facilities needed to process and recover the underlying sulphides (e.g., Alacer Gold or Orla Mining, noted above), a much larger resource could be unlocked at Tres Cruces and/or Lagunas Norte. That’s some big optionality. In the “Lagunas Reboot” scenario, I see Tres Cruces oxides as being the key to unlocking another 20 years of production there. Additionally, ORO’s Tres Cruces 43-101 report suggests that the project’s close proximity to highways and tidewater could make shipping a pyrite-gold concentrate offsite for processing viable. Decisions, decisions… i.e., optionality.
I’m not sure how this all ultimately plays out, but the pieces are all there on the table for anyone who looks; and there’s a big pile of cash waiting there to be picked up. Now with ORO having quantified the leachable component of its deposit, I think that those pieces are going to fall into place for people/corporates looking at this situation and I think that’s going to bode well for my holdings in ORO. New Oroperu has been buried in obscurity for well over a decade and today’s resource update shed the first new light on the project in a very long time… and Tres Cruces shined back. Anyone who looks at ORO and knows mining will see what I see here… and I think that the shine from this resource update is bright enough to precipitate some action. Tres Cruces is a choice deposit and ORO trades at a market cap that is a fraction of just about any peer comparison you could come up with, so I think something’s gotta give…