Orinoco Gold, Low-Cost, Funded, Production in 6 Months

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Australian-listed Orinoco Gold (Ticker: ASX:OGX) (OGX.AX) (OGX:AU) is endowed with expansive central Brazilian gold assets, most notably the Company’s 70% owned Cascavel Gold Project, which is part of Orinoco’s Faina Goldfields Project, “FGP.” I believe the Company has one of the cheapest risk-adjusted valuations of any near-term gold producer on the planet. A company with no debt and expected to commence production within 6 months. Cascavel is fully permitted & funded, boasting all-in sustainable costs estimated at US$ 700/oz. All of this, yet a market cap of A$ 17 million = US$ 12 million. The mine plan calls for CY 2016 gold production of up to 20,000 ounces, (14,000 ounces net to Orinoco). That would equate to [potentially 14,000 x a US$ 400/oz margin = US$ 6 million of operating income]. Not a forecast by me or the Company…

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Orinoco is also making steady progress at its nearby, 100% owned, Sertão Gold prospect. Orinoco intends to largely self-fund the Sertão prospect, therefore, the Company may never need to access the equity markets again (my opinion only), except for accretive tuck-in acquisitions. Orinoco acquired the Sertão leases, including the past producing Sertão Gold Mine, from Troy Resources in February 2014. The leases are located 28 km by road from Orinoco’s flagship Cascavel Project. The Sertão Gold prospect is located on an existing mining lease, and boasts historical production of 256,000 ounces gold at a blockbuster grade of 25g/t.

Three promising prospects, Sertão, Tinteiro & Garimpo, alone, could be worth Oninoco’s entire market cap

Longer-term there’s the Tinteiro prospect, a poly-metallic discovery located in the central portion of the Faina Greenstone Belt, southwest of Cascavel. Sample silver assays at Tinterio include:

  • 17.5 m @ 1,263 g/t Ag
  • 25.0 m @ 39.2g/t Ag: including 3m @ 97.2g/t Ag from 114m 
  • 4.4 m @ 760.3g/t Ag: including  1.05m @ 2,510g/t Ag from 157m
  • 4.7m @ 58.6g/t Ag: including 0.85m @ 236g/t Ag from 162m

In October 2014, Orinoco materially increased the size of its Cascavel Project after securing a 70% interest in the Garimpo prospect, a nearby tenement with known gold mineralization. The tenement is situated north of Cascavel’s and Tinteiro’s poly-metallic prospects. Garimpo contains promising northwest extensions of Cascavel & Tinteiro, extending the known Cascavel structure by 60% to nearly 4km of strike. I believe Orinoco’s three highly promising deposits,Sertão, Tinteiro and Garimpo alone could easily be worth the Company’s entire market cap of US$ 12 million. 

As impressive as what Orinoco DOES HAVE is what it does NOT. Dozens or hundreds of millions of remaining cap-ex to reach cash flow positive operations, significant geopolitical risks in places like central Asia or western Africa, management members drawing high salaries, working in cushy offices in London & Vancouver, (rarely if ever visiting the project site) and high op-ex of $1,000/oz +.  That might have played well in 2011, but not so much today in high cost places like northern Canada and Australia. 9 of the 12 listed executives on Orinoco’s website have either direct exposure to Brazil, or are long-time mining experts, or both. The Company’s management and Board is led by 3 proven leaders, the Co-Founders are. [Please visit list of Management & Board members.]

Co-Founders:

Managing Director, Mr PapendieckDiploma of Law from the NSW Legal Practitioners Admission Board (Dip. Law, NSW LPAB).

Chief Geologist, Dr. Marcelo De-Carvalho, (Metalogeny), PhD (Metalogeny & Geochemistry), CREA.

President Brazil Operations, Dr. Klaus Peterson, M.Sc (Mineralogy & Petrology), PhD (Mineralogy & Petrology), AusIMM, CREAM.Sc (Mineralogy & Petrology), PhD (Mineralogy & Petrology), AusIMM, CREA.

So much for spellcheck!

Orinoco’s management and Board separate it from dozens of juniors clamoring, hoping, desperate to get bought out before hitting the liquidity wall. Boots on the ground is one of the most important factors in getting a mine over the finish line. The Company contracted a local mining team with 20 years of experience, including geologists, mining engineers and metallurgists. There are consultants, senior Management and Board members willing and able to bring Cascavel into production. There are a number of executives and employees living in Brazil year-round. I took comfort and was greatly impressed by both how many personnel are on site AND how much credit senior management attributes to them. This team gets it, there’s no bureaucracy or hierarchy, just experienced mine builders.
 

More than ever, a gold junior requires an experienced management team and Board, Orinoco’s got that covered

Screen Shot 2015-11-07 at 6.39.08 PMOrinoco’s management and Board separate it from dozens of juniors clamoring, hoping, desperate to get bought out before hitting the liquidity wall. Boots on the ground is one of the most important factors in getting a mine over the finish line. The Company contracted a local mining team with 20 years of experience, including geologists, mining engineers and metallurgists.

There are consultants, senior Management and Board members willing and able to bring Cascavel into production. There are a number of executives and employees living in Brazil year-round. I took comfort and was greatly impressed by both how many personnel are on site AND how much credit senior management attributes to them. This team gets it, there’s no bureaucracy or hierarchy, just experienced mine builders.   

A company that trades 525,000 shares daily, Orinoco Gold is flying under the radar because stakeholders are entirely focused on bringing Cascavel to life. But first, it’s my job to bring Cascavel to life for readers looking for attractive risk/reward opportunities. The Cascavel Project hosts high-grade, structurally-controlled coarse gold shoots, where underground sampling returned bonanza grades including 15 meters at 88g/t.
 

What might readers and prospective investors be missing? One thing that is that the Cascavel project contains a non JORC-compliant resource, but that’s not as uncommon as it seems. With coarse, high-grade vein systems, drilling A LOT of holes could still fail to provide enough comfort to establish a JORC-compliant resource. Even bulk sampling is not necessarily accepted for a JORC-compliant resource. So the question facing Orinoco was, should it try to become JORC-compliant, spending a lot more time and money? Or, should it focus capital on moving into small-scale production?

Do you want JORC compliance or profitable near-term production?  

In this case, up to 20,000 ounces in 2016, (14,000 ounces net to Orinoco). The Company made the decision to go for it. No matter what I or anyone on the Board or Management team says, some will stay away from a non JORC compliant resource. This is a blessing and a curse. While fat cat hedge fund types might wait for clearer signs of value, smaller investors can build positions before the, “smart” money piles in.

Most readers may not recognize that the bulk of Orinoco’s mine development expenses are in the Brazilian Reals, a currency that has cratered vs. the $US dollar. As a result, in Brazilian dollars the gold price is near an all-time high. I know this might be difficult to understand at first blush, but I did the math. That’s why with 14,000 ounces of gold (net to Orinoco) next year, the Company could generate nearly US$ 6 million in cash flow (not revenue, not gross profit, true cash flow). That’s impressive for a company with a market cap of US$ 12 million. Note, this assumes price of US$ 1,100/oz. Gold prices above US$ 1,100 could generate substantial leverage to the underlying price of gold. An increase in the US$ gold price from US$ 1,100 to US$ 1,200 would be a 9% gain for physical gold, but a 33% gain for Orinoco investors.
 

But wait, there’s more. Orinoco plans to double production to 40,000 ounces of high-grade gold in 2017 (28,000 ounces net to Orinoco) while the percentage of leverage, 9% vs. 33% would not change, cash flow would double to ~ US$ 12 million. Remember, that’s on an uptick in gold price by $100/oz to US$ 1,200/oz. All else equal, each $100/oz gain generates ~$6 million of incremental cash flow.

Conclusion

Many non-producing gold companies say that they will be in production soon, or early next year, but have way more risk than Orinoco. Peer near-term producers may require additional capital, have debt to pay off or still be in need of capital to proceed. That’s not the case with Orinoco Gold. Given the lower risk factors and consistent execution to date, I submit that the Company’s valuation is shockingly low. From A$ 0.10/share, the share price could double or triple in the next 6 months as production comes to fruition. 

 

Disclosure:

Orinoco Gold (Ticker: ASX:OGR) (OGR:ASX)  is a speculative, small cap company. An investment in Orinoco Gold is not suitable for all investors. Readers and investors are encouraged to do their own due diligence before buying or selling stocks, especially small cap stocks. Due diligence should include consulting with one’s own investment advisor. The author, Peter Epstein, owns shares of Orinoco Gold. Mr. Epstein is not a registered financial advisor. Readers should take this fact into careful consideration. 

Mr. Epstein wrote this article entirely on his own and it expresses only his opinions and conclusions. He cannot verify that the facts herein are accurate. However, Mr. Epstein believes that they are. As of the date of this article, Orinoco Gold is a sponsor of EpsteinResearch. For more information about EpsteinResearch please sign up for free articles and written interviews, buy providing an email on the home page.

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