Orinoco Gold (ASX: OGX, Share Price: $0.087, Market Cap: $15m) is an emerging gold producer that we’ve been looking to introduce to our Portfolio for some time, based on its outstanding Brazilian project fundamentals. A catch-up at the Resources Round-up in Sydney with management provided reassurance and the perfect opportunity to introduce the stock to readers last week as a Spec Buy around $0.072 – with the stocks already up 21% on our buy-in price.
Orinoco has announced a number of key management appointments as it builds its Cascavel operations team, including the appointment of Andrew Tunks as General Manager, Operations.
Market Significance
I believe the introduction of Orinoco Gold to our Portfolio is well-timed, as its share price has recovered solidly from 12-month lows and has risen steadily on the back of growing trading volumes. The lack of a JORC-compliant resource due to the high ‘nuggety’ nature of the gold mineralisation might initially discourage some investors until grade is established and steady-state production achieved; however this presents a real buying opportunity in our view. The rewards far outweigh the risks and we have every confidence that a significant re-rating is taking place ahead of the late 2015 production milestone.
Announcement Detail
Orinoco has today advised of a several key management appointments as it continues to build its Cascavel operations team ahead of production commencement during late 2015.
The key appointment in our view is that of Andrew Tunks as General Manager, Operations to oversee the development phase of the Cascavel project in a part time capacity. Andrew has more than 25 years’ experience in senior roles in exploration and mining in Australia, Africa and South America. Andrew’s role includes development of the Cascavel underground gold mine and installation and commissioning of the gravity gold circuit, which will be located at the site of the nearby Sertão gold mine.
Orinoco has also appointed Mr Noel O’Brien, a highly experienced metallurgist, as the company’s Process Consultant. Noel will be responsible for all aspects of the design, installation, commissioning and oversight of the day-to-day operations of the Sertão gravity gold circuit and brings more than 40 years of experience working in the international mining industry, specifically in mineral processing.
In addition, Jim Porter from JPMC Consulting has been appointed by Orinoco as its Mining Consultant. He has experience in operational roles ranging from direct mine management to company general management. His consultancy firm, JPMC International, has been appointed as Orinoco’s mining consultants, with Jim providing input into mine design and scheduling, mining operating standards and procedures and geotechnical advice supporting these activities.
Technical Significance
The transformation of a company like Orinoco from advanced gold resource play to gold producer is an extremely important phase and the key from our perspective is enhancing the company’s skills in the right areas. Encouragingly, Orinoco has significantly strengthened its production capabilities with experienced individuals that have outstanding operating credentials. This further de-risks the Cascavel project.
Of particular relevance is Jim Mr Porter’s experience in running the Western Deep Levels gold mine on the Witwatersrand in South Africa, one of the world’s largest deep-level mines. The Witwatersrand’s narrow, high-grade gold lodes hosted in dipping structures are technically similar to the Cascavel project.
Other Recent Activity
The new appointments coincide with the mining contractor mobilizing to site this week to commence sinking of the main incline shaft at Cascavel. In addition, draw-down of the principal US$8 million Cascavel finance facility also commenced this week, facilitating the commencement of construction of the 15 tonne per hour gravity gold circuit.
Last week the company completed execution of financing arrangements with Cartesian Royalty Holdings (CRH), an associate of Chancery Asset Management. CRH is sponsored by Cartesian Capital Group, a US$2b private equity group.
Investment Overview
Orinoco’s key focus is its Cascavel gold project, which forms part of its broader Faina Goldfields Project, encompassing an area of around 200 sq km in Central Brazil. The company’s strategy is to initially develop a relatively small-scale, start-up operation, with plans to then increase both gold resources and mine life through cashflow-funded exploration.
Gold mineralisation at Cascavel is vein and shear-hosted orogenic in style, which means it’s typically high-grade, coarse and free-milling in nature – which are all positives. The only downside is that this style of mineralization, combined with the narrow mineralised lode structures, precludes the accurate and cost-effective calculation of grade for a JORC-compliant resource. This is due to the likelihood of inherent sampling bias and the requirement for very high-density drilling.
The good news is that the mineralisation is virtually identical in style to that at Anglo’s Crixas mine (2.3Moz @ 7.76g/t Au) and Yamarna’s Pilar Mine (1.4Moz @ 4.1g/t Au), along with numerous other examples within the five parallel greenstone belts hosted within the region. Furthermore, we are confident that Cascavel can deliver high-grade ore after dilution at the minimum mining widths of around 1.5 metres.
Data from historic mining, along with recent bulk and channel sampling by Orinoco, suggests diluted grades within the high-grade shoots in the vicinity of 15g/t – 30g/t, whilst even more recent bulk and panel samples have assayed between 24g/t and 88g/t Au.
Initial plans for Cascavel involve a four-year, 40,000tpa air-leg underground operation, with the expected 20g/t gold ROM ore easily treated with high recoveries through a simple gravity circuit, resulting in a low capex operation (~US$6.6 million), with low operating costs (A$250/tonne).
Cascavel is fully permitted, with the mine site permitted for up to 50,000tpa extraction under an extendable trial mining licence. Treatment will be conducted at the 100%-held Sertão mine, situated 28km by road from Cascavel, which is licenced to treat up to 300,000tpa of ore and planned to become a treatment hub for any future discoveries. Orinoco has applied for a full mining licence at Cascavel, with the aim of expanding operations once granted.
I have attached below the recent modeling/valuation compiled by Breakaway Research, which I believe to be quite conservative in nature. Their estimates have been based on an initial four-year production scenario, with base-case production of 40,000tpa, an average grade of 20g/t gold, with project development between May and December 2015 and initial production commencing during January 2016.
A grade of between 15g/t – 30g/t has been predicted, although importantly the project will still be viable at even 75% or less of this, given the low capital and operating costs. Analysis suggests a relatively low-cost operation, with C1 costs in the order of A$460/oz.
A key strength of the project is the excellent potential for resource growth, and hence production expansion, both through extensions of the known mineralisation and through new discoveries. Key areas for expansion include down-dip and along strike at Cascavel, as well as underground mineralisation at Sertão, which historically produced 256,000oz of oxide gold from a shallow open-pit at an average grade of 24.95g/t Au.
Summary
I’m excited by the potential of Orinoco Gold and its Cascavel project. There’s no doubt that the lack of a JORC-compliant gold resource will hamper the company in some respects and market acceptance will take time. Nevertheless, the high-grade nature of the mineralization suggests a low-cost mining operation with robust margins, which should in time win over the doubters. I believe the potential rewards more than justify the risk associated with a non-JORC development and accordingly we maintain our Speculative Buy on Orinoco Gold around $0.087.
