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Orosur Mining – Excellent work done on the ground, but when will shareholders be rewarded?

By Graham Neary | Tuesday 23 August 2016

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

Orosur Mining (OMI) is one of the higher-quality gold plays on the market. It operates the only gold-producing mine in Uruguay, where it has controlled costs and produced some excellent results in recent years. But this morning brings news that an NED has almost halved his stake, which reminds me of the bear case here.

This is a stock I briefly held in 2013/2014, tempted by some fantastic cash flow results against a very small market cap.

It was a successful short-term investment for me but I had no choice except to sell when the company failed to fulfil its stated promise to start paying dividends.

The mine at San Gregorio in Uruguay was clearly performing very well, but if the company never paid a dividend then that severely limited my attraction to the shares. Betting on continued success at San Gregorio was risky enough, but to get no payback from it and to rely instead on the company finding new projects was just too risky for me.

I haven’t owned the shares personally since then, although they would have been an excellent way to profit from the resurgence in the gold sector – the share price has more than trebled since the start of the year.

Results for the year ended May 2016, published last week, showed that despite posting a statutory loss after asset impairments, the company continued to grind out a strong operational result.

All-In Sustaining Costs came in at $1,069/oz, in line with guidance. Cash flow from operations, before working capital, came in at a stunning $7.6 million. Bear in mind that even after trebling, the market cap is now just £17.6 million ($23 million). A price to operational cash flow ratio of about 3, then.

My concern remains that longstanding shareholders are not going to get the rewards from this which they perhaps ought to.

The company spent $2.8 million on exploration and investment across Uruguay, Chile and Colombia, and in the end net cash increased by the relatively modest amount of $0.7 million.

Arenal Deeps, the primary cash producer at San Gregorio, is estimated to be exhausted by November 2016.

A new underground mine is being prepared at the site but with 160,000 total reserves as at May 2015 and 36,000 having been produced in the subsequent twelve months, plus impairments, I wonder how many productive years are left at the site?

The company has successfully extended mine life before, and is currently assembling a new portfolio of exploration assets, so I can see why investors might continue to find the shares interesting for some time to come. It doesn’t fit the sort of risk profile which I’m willing to accept, so it’s not for me, but I’ll continue watching to see how it eventually turns out!

An NED sold more than 1% of the company yesterday, although he retains 1.2%. Perhaps other investors should also be thinking about top-slicing at these levels?

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