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New mine coming online should give Orosur a boost

By Gary Newman | Monday 12 December 2016

Disclosure: I own shares in one or more of the stocks mentioned. 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) remains one of my favourites amongst the small gold miners listed on AIM, and I now hold shares in the company myself, hopefully awaiting a turnaround in the price of gold.

The share price was higher when I last covered this company, back in September, as being worth a look, but then at that time gold was also trading at well over $1,300/ounce, so with that now back around the $1,160 area, a drop in the price of the shares in Orosur was inevitable.

Unlike so many of its peers on AIM, this gold miner actually produces the metal already, rather than its value just being based upon reserves in the ground that may or may not ever gain the finance needed to produce them.

I would expect results from Q2 2017 up until the end of November to be far less impressive than the previous quarter, given the average gold price during the latest period being lower, but with all in sustaining costs of $989/oz now, as opposed to $1,166 a year earlier, I would still expect the company to manage to make a net profit for the period.

During Q1 the company made post tax profits of over $2.7 million, which I think is quite impressive given its market cap of just £12.5 million, and that came from gold production of 9,950 ounces with an average realised price of $1,324/oz, so as long as costs have remained similar, I would expect profits to be $1 million or so lower.

The company does burn through a fair amount of cash, with nearly $2.5 million used during Q1 2017 for investing activities, but that has included the development of its San Gregorio West underground mine, which is expected to commence production at any time now. It is also looking to expand San Gregorio during 2017, with three other underground projects being looked at for development.

It also still has several exploration assets which it has been drilling, although at the moment some of those are unlikely to be considered for production due to the gold price needed to be economic.

Despite the level of investment made by the company during the quarter, it still managed to increase cash by over $660,000, and at the end of August it had nearly $5 million in the bank. It also had nearly $13 million in inventories and a further $2 million receivables, but there is also some $10.7 million of current liabilities on the books, made up of money owed to commercial suppliers plus salaries.

It has virtually nothing in the way of debt and net assets of circa $35 million – although that does include $17.7 million of money that has already been spent on exploration and evaluating its projects, as well as a further $10.2 million that has been spent on equipment and on developing its licences to the production stage.

So on a value basis this company looks cheap to me at a market cap of just £12.5 million and a share price of 13p to buy, as long as gold doesn’t fall further and ideally shows some sort of a bounce. The company should be well on track to hit its FY2017 production target of 35-40,000 ounces, having produced just under 10,000 ounces during Q1, and although that is lower than what it was producing a year ago, it is expected that San Gregorio West underground could produce as much as 35,000 ounces over a 15-18 month period once the mine is up and running.

Existing reserves sat at around 200,000 ounces as at the end of May, and what is encouraging is that the company appears to have the ability to add to that, judging by the exploration work that it has been carrying out.

The biggest risk here is the price of gold, which is quite a nice position to be in with a small AIM company as usually there are far more factors to seriously consider, but as long as that stays reasonably strong then Orosur should do well and I’m happy to keep holding, barring a collapse in gold price. The share price here should find some support in the mid 11p range, which may well be seen if gold takes a tumble after the Fed meeting this week.

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