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Orosur looks under-valued as gold shows continued strength

By Gary Newman | Wednesday 19 April 2017

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) certainly isn’t amongst the more popular resource stocks on AIM and trading volumes are often verging on non-existent, but I believe that many are missing an opportunity here as they go chasing rainbows with companies that are years away from production, assuming they ever actually get to that stage!

Gold has been slowly creeping back up towards the $1,300 area, and with a fair bit of turmoil around the world at the moment, and plenty of potential for that to escalate, which I think would give gold a further boost and push it even higher. Even the first of potentially three interest rate rises in the US had very little effect, certainly when compared to the rate increase in late 2016.

Where Orosur differs from so many other AIM mining companies is that it is actually producing gold, and has been for some time, and has recently been expanding its existing operations in Uruguay, and with further possible upside further down the line with other exploration projects in South America.

The company has already been making a decent level of net profit from its San Gregorio operation, but with reserves declining at its existing operations within the licence area it needed to bolster those, and that has come in the form of the development of the underground mine at San Gregorio West, which produced throughout Q3 2017. The open pit mine has historically produced more than 530,000 ounces of gold, at an average grade of 2.12g/t, and the company is expecting to update its reserves now that the underground operation has commenced – and with potentially similar upside and development on other areas of San Gregorio in the future, depending on test results, as further exploration is ongoing.

Orosur recently released its results and operational update for Q3 2017 up until the end of February, and whilst they didn’t contain anything earth-shattering, I think they showed that the company is still making solid progress.

Production has been down slightly as the transition is made to the underground mine, but despite that it showed a strong performance during Q3 2017 with 7,820 ounces of gold produced – which compared favourably to 7,274 ounces for Q3 2016 and 6,852 ounces in Q2 2017. This means that the company is still on track for guidance of 35,000 to 40,000 ounces for the full year, and it is good to see the new mine get up to this level of production so quickly.

A glance at the figures might be enough to put some people off of the investment case here, as all-in sustaining costs have risen to $1,289/oz, as compared to $978/oz the previous year, but that is as a result of the development capex for the new mine – so far this financial year the company has spent $9 million on the San Gregorio project, and as well as the underground operation has also had further exploration success in the Central and East segments of the licence.

Looking at costs on a purely operational basis, they were actually down 6% for the quarter, at $858/oz, and in the middle of the $800-900/oz guidance figure.

In terms of net profit, the company has made $4.1 million so far this year – which is a big improvement on the $500,000 it made for the same three quarters in 2016 – and that has come from a gold price averaging just under $1,200, so at nearly $100 per ounce higher currently that will certainly help increase profitability even more.

What I find even more impressive is that the company has achieved all of this without taking on debt – total debt is a mere $200,000! – and is confident that it can carry out all of its future developments at San Gregorio without any external funding – it had $2.4 million in the bank still at the end of Q3 2017, despite the amount spent on capex.

In terms of downside, this largely relates to the gold price itself, and any large drop would of course have a major impact on Orosur as it is largely a leveraged play on the gold price, although not as direct as some companies, due to low trading volumes.

There is of course also some risk with the fact that it is reliant on one project, albeit with plenty going on at different parts of San Gregorio. The fact that the mine is in South America may put off some people, but the reality is that Uruguay is a very stable country, with high GDP and fairly low levels of poverty, plus has weathered the recent economic downturn very well, so it is one of the few countries in this region that I would consider to be totally safe on that front.

I have been holding shares in this company for a while now and am expecting it to continue to report some impressive figures going forwards, when taken in the context of the market cap here only being just over £15 million. With the share price around 15.75p to buy I’m more than happy to keep holding, and am considering adding more.


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