Disclosure: The following represents my opinions only. I am long ORO.V (Image credit to Seth Schweit on Unsplash)
I’ve been thinking about writing something lately and this seems like as good a day as any to do it. I’m a big fan of knowing what I own and why I own it, so days like today in the commodity sector don’t bother me much. Today, I know that if I hold cash in my portfolio, its free cash flow yield is precisely zero. Meanwhile, I know that the energy stocks in my portfolio have free cash flow yields of anywhere from 15 to 50%. I know that gold companies are trading at their widest discounts to NAV, and their lowest cash flow/earnings multiples, in quite some time. Likewise for base metal producers. Hmmmm… not a tough decision in terms of what I think I’m better off holding these days, but hey, that’s just me. Commodities and the companies that produce them do bob up and down like buoys in the market ocean, but the “tide” is where I try to focus my attention. For today, the tide of the falling dollar is ebbing, but I don’t see the metals and energy markets being significantly different today than they were yesterday. I’d actually argue that action like today is a gift to traders, or perhaps to those who were a little slow off the mark when it came to recognizing the inherent value being offered by the commodity sector in this market. But don’t just take my word for it… Paul Tudor Jones lays out his thinking on the topic of “inflation trades” in this video, which I think folks should seriously consider. Pay particular attention to his points re commodity asset allocation relative to what might be considered “normal”. Then consider that there is absolutely nothing normal about The Great Restart and the trillions of dollars behind it… and ahead of it. I listened to all of Chairman Powell’s comments and question and answer period after the FOMC meeting yesterday and the message was that “the inflation you’re seeing is transitory”. The market seems to have taken that at face value. I’d ask people, “What else could he have said?” Imagine if when asked about inflation concerns, Powell’s answer was “Yes, we are deathly afraid of it, we are tapering our bond purchases immediately, and we are looking to start increasing rates in Q1 2022.” Even acknowledging that inflation is of any concern could cause market mayhem, especially in the bond market, where the scariest part of the current balancing act lives. Instead the message was (and this is me paraphrasing): “We don’t care how hot inflation runs… it could run hot for 12-18 months, but then we think it’ll relax.” Okay, sure, that’s a view, but it’s a guess (and Powell openly admits there is no playbook for this)… and during those 12-18 months, while we “run hot”, is the market going to just to brush that off? Bah. I don’t think the market has the fortitude to do that for long in the face of what will continue to be some hot economic numbers (and seemingly persistently constrained supply chains). Sure copper was overbought short term, so maybe it could drop into the mid-$3’s as China steps away from the market (and actively tries to manage prices… good luck…), but how can anyone argue with the long term theme given the Green New Deal narrative out there? It’s a lot to chew on, but in a nutshell I’m unfazed by days like this.
Now, to the news of the day from New OroPeru (ORO.V, last at $1.99). Regular readers will know that this has been a favourite special situation of mine for years… and today, there is a well-chosen changing of the guard underway. First Light Capital (XYZ.V, last at $0.47), a shell which includes Jim Currie (former COO of Equinox Gold), Steven Botts (Peru-based, previously at Tahoe), and Marshall Koval (Lumina Gold, Equinox), is bringing a $20 million investment into New OroPeru, at an effective price of ~C$2.33/share once you follow the prices and ratios. The quality of the people coming in (Jim Currie will be the CEO) is well-known in mining circles, and their endorsement of the project is sure to catch more than a few eyeballs.
One of those eyeballs will likely belong to Boroo, who recently closed its deal on the purchase of the nearby Lagunas Norte mine from Barrick. If Boroo thought that Tres Cruces was just going to sit and wait for them, then today’s news should serve as a kind of wake-up call. When a team of this pedigree validates an asset of this quality, literally on your doorstep, you take immediate notice… unless you are actually comatose. The value of Tres Cruces to Boroo is literally undeniable. The Tres Cruces resource has been well-defined by drilling (371 holes, totalling >73,000 metres) and weighs in with an indicated resource of around 2.5 million ounces, at an average grade of 1.65 g/t Au. That resource includes 630,000 ounces of leachable gold (425,000 ounces of that being oxides at ~1.4 g/t, with the balance being leachable sulphides) which could be leached at the Lagunas Norte facility for the cost of a sandwich and a bag of chips. Well, not quite that cheap, but for the cost of building a haul road and and maybe $5-10mm of pre-stripping (you could probably use the stripped material to build the haul road…) you’re up and running. New OroPeru’s Tres Cruces deposit is about 10-12 km from Lagunas Norte and the leachable ore could be processed with the existing Lagunas facilities, as is, as soon as you could start stacking it. To quantify it, just the very top of the Tres Cruces deposit represents some 500,000 ounces of (leachable) recoverable gold; and those ounces would be expected to have some of the lowest cash and operating costs in the industry (thanks to the low strip ratio and high grade). At US$1500 gold, margins are likely to be in the $900-1000/oz range. That’s US$400-500 million in undiscounted cash flow sitting on the table, with absolutely minimal front-end capex. There is, and I mean this literally, no better way to jumpstart Lagunas Norte than with a Tres Cruces bolt-on. Anacortes Mining, as the new company will be called, will have a pro forma enterprise value of ~CDN$76 million (CDN$96 million market cap with $20 million in cash). For those keeping score, from Boroo’s perspective that’s half a billion in USD cash flow trading in the market for CDN$76 million. Coincidentally, that’s about the amount of cash flow you’d want to build a combined (“full meal deal”) operation at Lagunas that could run for decades. Decisions, decisions. First Light and its backers might be some of the most opportunistic people on the planet. I love this move.
I could go on at length about the ORO story, but I think my point is clear. The interest of First Light’s management team is an undeniable validation of the quality of the Tres Cruces asset, while the value of the asset to Boroo is equally undeniable. I’m not sure what kind of new chemistry might precipitate on the back of this news, but I’ll be watching with interest. Without question, the incoming team has the skill sets, the experience, and the financial connections to take Tres Cruces down the path of development — similar to what has happened with Prime Mining (PRYM.V, last at $3.99). New OroPeru can now viably go it alone, or it can make a deal with Boroo, but now New OroPeru is no longer subject to the whims of Boroo; and that’s a big difference… to me, that’s the kind of landscape shift that gets you a re-rate.
I don’t want this note to run too long, but I haven’t even touched on the ~2 million ounce sulphide resource grading ~1.8 g/t Au that sits underneath the oxide “cream” on top, and I’d be remiss if I didn’t. In particular, there are undrilled high-grade feeder zones at depth within the Tres Cruces deposit that have never been followed up on… this includes hits like 19.5 metres of 11 g/t Au at depths of just 210 metres (bottoming in mineralization); with accompanying rock textures suggestive of potentially significant remaining vertical extent in this fully preserved epithermal system (this deposit is a beauty). These feeder-zone targets offer significant high-grade exploration potential that most people don’t even think about. High-grade upside targets aside, the broader sulphide resource could be processed one of two ways in development: 1) build a sulphide processing facility at Lagunas and run the combined ~7 million ounce sulphide resource through it, or 2) produce a pyrite-gold concentrate, transport it to the port at Trujillo (3 hours by paved highway), and process the concentrate off site. That’s $3 billion of gold in the ground that the market values at zero. Hmmmm… decisions, decisions.
As you can probably tell, I’ve spent a lot of time thinking about New OroPeru. I’m a happy shareholder today. I see this changing of the guard as profoundly positive from the standpoint of “validation” and “ability to execute”, and I see a PRYM-like re-rate coming here as the new team lays out the story for the market (after all, I’m just a guy with a blog). Something that I’ve always talked about is how complementary the Tres Cruces deposit is to a full-scale integrated (re)development of Lagunas Norte. Today that option is as alive as it has ever been… and now, with this new management team, I think the “go it alone” option is truly viable (think PRYM)… because when you can truly say that you have the option to build or sell a deposit, you are beholden to no one for the approval of the path you choose.