INTRODUCTION
Allow me to introduce you to a company and their flagship project with the following characteristics :
Focus on gold
Near term production situation
NI43-101 compliant ( inferred ) resource of around 400K ounces from 2013
High grade , previous operators yielded average between 3.6 and 5.5 gr/t
High recoveries of +95% , real data from a bulk sample
Near surface , open pittable project
Great jurisdiction , Canada, Ontario, Kirkland Lake area
Healthy share structure with high insider ownership ( 35% )
Recent upgrade of local infrastructure allowing all year/all weather acces to the mine site
Production scenario based on toll milling with plenty of milling capacity in the immediate neighbourhood
Low capex project
Easy and quick permitting given no tailings facilities needed
Big momentum with major catalysts the coming weeks ( resource upgrade , PEA , 2 drill programmes )
Active permits for drilling in 2017 and 2018
Fully funded with 1.2 M in cash and cash equivalents and no debt
If you have made it so far, then probably you would want to learn more about this company being Orefinders Resources ( ORX.V ) and their Mirado project.
PAST MILESTONES
Mirado is a former open pit mine, operated by Golden Shield Resources in the eighties with very high gold grades but closed due to uneconomical gold prices.
In 2015 Stephen Stewart took the helm as CEO of Orefinders , focussing on increasing shareholder value after the difficult years since inception in 2013.
His mean focus as short term value driver was the stockpile project, processing ore left behind on site by Golden Shield due to uneconomical gold prices at that moment. This resulted in a first revenu generating activity through the sale of 1414 good delivery ounces out of these stockpiles. In addition this project resulted in extremely valuable datapoints to study the potential to bring this former open pit mine back in production.
Next to this succesfull bulk sample project, Stephen Stewart negociated the sale of a non-core asset, The Derlak project located in Red Lake , Ontario to Pure Gold Mining ( PGM.V ) for total proceeds of 1.3 M C$, in a combination of cash and PGM shares.
As a consequence of both operations/transactions, ORX can boast with a very healthy balance sheet including 1.2 M in cash and cash equivalents and no debt.
FUTURE MILESTONES
A. Development of Mirado towards production next year
With real data from the stockpile project , proving average grades of 2 gr/t and recovery grades of +95% , management published their 2017 plan, focussing on a resource update and PEA ( more a PFS ) on Mirado by summer .
With reference to the resource update, management decided to resample the former Amax drill core , recently discovered at the Ontario MNDM, to allow ORX to target higher grade zones within the 2 gr/t average pit, based on the fact that the Amax drillholes from 1981 were spaced only 20 meters apart.
Together with the other drill results and the data from the stockpiles , it will allow ORX to reclassify the existing inferred resource to higher categories perhaps even partially into reserves. And through increasing the used cutoff from .58 gr/t to 1 gr/t have a very realistic view on high grade potential tonnage for short term production.
With reference to the PEA , more a PFS to me , since based on real data regarding average grades and recoveries from the bulk sample/stockpile project but also realistic cost assumptions based on hauling, trucking and milling expenses incurred during the same project.
The resampling of the old Amax drillcore offers a second advantage to ORX, through the 20 meter spacing of the drillholes, it will give Orefinders the option of going for selective mining in the broader Mirado pit , aiming for the higher grade zones. As previously mentioned, Golden Shield Resources , a previous operator of the Mirado Mine, yielded average gold grades between 3.6 and 5.2 gr/t.
Given the toll milling approach and the high grade , near surface character of the project this should lead to a low capex, low opex, high IRR type of project.
B. Exploration at the high grade gold MZ Zone and at the North Zone with VMS potential
(1) The MZ Zone
The so called MZ Zone is located approximately 200 meters west from the historical Mirado open pit and has very high geological similarities to the South Zone ( Mirado ). Orefinders considers the MZ Zone to be a possible extension of the Mirado Pit. ORX completed an extensive sampling/trenching programme in 2013/2014 with very promising results.
Based on trenches of up to 21.8 gr/t ( uncut ) over 4.8 meters and samples of up to 48.5 gr/t , ORX announced a follow up drill programme in their 2017 plan focussing on confirmation drilling in this zone and infill drilling connecting both zones, potentially expanding future resources and LOM of the Mirado Mine.
Active exploration permits for 2017 and 2018 are in place and in addition these exploration expenses are covered under the JEAP program for an amount up to 100 K C$.
More details about timing and size of this drill program can be expected shortly.
(2) The North Zone
The second drill program will take place at their North Zone.
Where MZ is characterised by high grade and near surface gold, the North Zone is rather a VMS like structure with base metals next to high grade gold but requiring deeper drilling.
The North Zone has been in production in the 1930’s through underground mining.
Blocks of VMS material sampled from stockpiles located near the North Zone shaft area during the fall of 2012 assayed 134.5 g/t Au, 63.5 g/t Ag, 23.9% Zn and 1.6% Cu.
ORX conducted a limited drill program in 2013 , focussing solely on gold and not on polymetallic content. Excellent results with broad intervals of high grade gold especially MD13-10
More details about timing and size of this upcoming drill program can be expected shortly.
FINDING COMPARABLE APPLES
Very hard to find comparable near term production situations like ORX.
In my opinion , one that comes very close is Sage Gold ( SGX.V ). Although I am very well aware that Sage is more advanced towards production , I am convinced the gap in time is less than 12 months.
From a jurisdiction point of view, both are located in Canada. Clavos in Timmins and Mirado in Kirkland Lake.
Both use a toll milling approach towards production. Sage concluded an agreement with Primero Mining and ORX used the Westwood Mill for their stockpile project.
The big difference between both is that Clavos is an underground operation while Mirado is also high grade but open pit mining. Open pit means by definition lower upfront capex and lower opex and as a consequence higher NPV and IRR in identical situations of LOM and targeted production.
Given the recent upgrade of roads and bridges at Mirado , there is all year acces to the mining site.
We will have to wait for the upcoming PEA at ORX to see what the targeted production will be like given the LOM option that was taken.
But no matter how you cut it , there is a very big valuation gap between Sage and Orefinders , even taking into consideration that Sage is more advanced towards production.
At 5 cents , ORX has a market cap of around 4 M and based on 1.2 M in cash and cash equivalents , they have an enterprise value of around 3 M.
Sage has a market cap of 12 M and an enterprise value of 14 M.
EXPECTED NEWS TOWARDS RESOURCE UPDATE AND PEA
We are expecting quite a flow of news progressing towards the release on the resource update and the PEA, not necessarily in this chronological sequence :
1. NR on the reassaying of the 2013 drillcore on the North Zone, tracing polymetallic content in this core next to the high grade gold, confirming the VMS potential at the North Zone
2. NR on the resampling of the old Amax drillcore ( 1980 and 1981 ) based on modern standards of testing and quality control, confirming high grade , near surface gold
3. NR on start and details of MZ drill program
4. NR on start and details of drill program at the North Zone
5. NR on resource update, defining higher grade zones ( through increased cutoff ) and upgrading resources to higher categories ( M&I perhaps even reserves )
6. NR on PEA , based on a toll milling approach and selective mining for higher grades resulting in a low capex, low opex, high IRR , high grade , near surface , open pit gold project
PUTTING A FAIR VALUE ON ORX - SOME NUMBER CRUNCHING
A. Lessons learned from the stockpile project/bulk sample
In making reference to the latest interim financial statements and the related MD&A on Sedar, the stockpile project processing around 25 KT ore , resulted in a gross profit of 125 K CAD through the sale of 1414 good delivery ounces at an average of 2 gr/t.
However in analysing the all-in cost production numbers , some costs were accounted for that are either one time items or recoverable expenses with no impact on the future operational profitability :
All costs related to the Closure Plan , to obtain approval from the MNDM to start the stockpile project , a one time cost ,approximately 150 K C$
The cost to upgrade road and bridge at Mirado , to allow all year long 30 ton trucks, a one time cost , approximately 100 K C$
The financial assurance bond requested by the MNDM, recoverable , approximately 100 K C$
The recoverable taxes paid on supplier invoices regarding crushing, trucking, milling and refining services , approximately 200 K C$
So taking into considerations these elements, this operation was in fact a cash and cashflow positive operation bringing the real breakeven level around 1,6 gr/t and with plenty of room for improvements in the following domains :
(1) Average grade of produced gold
The average grade of gold produced from the stockpiles was around 2 gr/ton. Given the fact that the stockpile material consisted of blasted material and contained overburden and waste rock , there is no doubt that the average grade of future operations can and will be much higher. The 2 most fundamental reasons behind are on one hand the reference to historical production data from Golden Shield Resources yielding between 3.6 an 5.2 gr/t and on the other hand the option from management to go for high grade selective mining within the broader Mirado Pit.
As previously indicated management has rediscovered the old Amax drillcore from 1980 and 1981 in the MNDM drillcore archives. Within the broader set of 55 drillholes , 31 of them were drilled at the now called South Zone or Mirado pit, with only 20 meter spacing in between, giving management after resampling ( process ongoing and results expected shortly ) an excellent base of data for exactly determining the high or higher grade zones for near term production.
(2) Negotiating multiyear contracts
The stockpile project or bulk sample if you like , was rather small in size leaving not much room for negociation not with contractors for the crushing and trucking nor with the mill owners.
Bringing Mirado back in production with possible production volumes of 150 KT to 200 KT per year for 6 to 8 years, is setting the scene for completely different discussions about contractor prices and milling based on solid multiyear contracts.
Especially on the milling side , given a lot of spare capacity at multiple mills in the immediate surroundings with the right specs to process the Mirado ore.
B. Profitability of future operations
Before going deeper into the fair value calculation , we want to make two fundamental assumptions for a base case scenario.
First assumption is that there are no additional payments to be expected from the past stockpile project.
Second and even though we consider the past bulk sample as a profitable , cash and cashflow positive operation, we will consider future operations to be breakeven at 2 gr/t, a first conservative element in our approach.
A first challenge would be to determine the total production potential from Mirado , the LOM and as a consequence the expected yearly production target in tonnes of ore.
In the 2013 maiden resource publication, the consultants were so kind to include a sensitivity analysis on the impact of variation in cutoff grade on the related ore tonnage and contained gold resources.
We are well aware that this sensitivity analysis does not equal a mineral resource statement but want to use these numbers as a starting point.
So with reference to page 57 and to the numbers on the right side in the table, aiming at 3 gr/t gold , approximatly 1.5 M tonnes of ore could be mineable.
But to stay on the conservative side , we choose to retain just 80%, being 1.2 M T.
We will at the end make separate calculations for a base case scenario based on a 8 year LOM and 150 K T production per year and a high intensity scenario based on a 6 year LOM and 200 K T production per year.
Given the recent upgraded infrastructure , giving all year, all wheather acces to the Mirado site, both scenarios should be achieveable.
Next step would be to move to numbers around the profitability of the future gold production.
Based on a breakeven level ( or AISC ) of 2 gr/t , an average grade of produced gold of 3 gr/t and a gold spot price at 1600 in C$, we come to a gross profit of 533 C$ per ounce produced and a net profit of 357 C$ while applying a 33% corporate tax level.
Again on the conservative side , since ORX has a pool of recoverable tax losses , a pool increased with the recent financial interim statements and the writeoff of the Derlak Project, and as a consequence will probably not pay any taxes for the first years of production.
(1) Base Case Scenario
150 K T production
Average grade of gold resources : 3 gr/t
Recoveries : 95% ( see confirmed results bulk sample )
Troy ounces = 31.1 gr
Net profit per gold ounce produced : 357 C$
Results in good delivery ounces produced : 13746 oz’s
Resulting in net profit : 13746 * 357 = 4.9 M C$
(2) High Intensity Scenario
200 K T production
Good delivery ounces produced : 18328 oz’s
Net profit : 6.5 M C$
C. Fair Value estimate for ORX
Before going into the fair value discussion , we want to reiterate the conservative nature of our approach , our goal is not to inflate expectations but have a realistic or even conservative estimate of the value of our investment.
The conservative approach was illustrated by the following elements :
Using a breakeven level of 2 gr/t , not taking into account the one time items and recoverable items , also not including potential cost reductions based on multiyear contracts for both contractor and milling company
Using an average grade of produced gold of 3 gr/t while historic production by Golden Shield yielded between 3.6 and 5.5 gr/t
Taking a conservative stance on the expected total tonnage , only retaining 80% to come to the 1.2 M T number
(1) Fully diluted shares
Shares issued and outstanding as per March 31st 2017 : 58713288
Total options outstanding per March 31st : 5871000
Total warrants outstanding per March 31st : 4459643
Total options expired on April 3rd : 975000
Total warrants expired on April 3rd : 1403571
Fully diluted shares : 66665360
(2) Project financing
The upfront capex will be very limited given the toll milling business model and the partnership with SCR Mining as contractor for the Mirado project. In a recent drill bit ( informational video ) from ORX management regarding this partnership, they announced that SCR will take at their charge the costs for site preparation , being refunded through invoices for contracting services and thus OPEX. So no real Capex, no need for project financing and no dilution of existing shareholders.
(3) Fair Value based on earnings
For the base case , using a P/E ratio of 10 : 4.9 M * 10 / 66665360 = 0.735 C$ per share
For the high intensity case : 6.5 M * 10 /66665360 = 0.975 C$
CONCLUSION
Based on the near surface , high grade gold with very high recoveries and the toll milling approach , Mirado will be a very profitable low capex, low opex , very high IRR project with limited permitting, financing and execution risk.
There is no doubt that there is a major valuation gap , given the actual market cap of around 4 M C$ , the company holding around 1.2 M in cash and cash equivalents and no debt.
With the upcoming newsflow in anticipation of the updated resource calculation and even more important the PEA , a major rerating is on its way.
