Orsu Metals Corp. (TSX-V: OSU) / (OTCQB: ORSUF) is an early-stage junior miner that owns 90% of the 760-hectare (7.6 sq. km; 4 km east-to-west & 1.5 km north-to-south) brownfield Sergeevskoe gold project in far east Russia. The project has a 2020, NI 43-101 compliant Inferred resource of 1.42 million ounces grading 1.45 g/t gold (on about one-quarter of the property). The Company has 42.5M shares outstanding & 48.1M fully-diluted, and the market cap = C$16M = US$12M.
In August, a fairly large-scale trial mining operation is set to begin. Over 18-30 months, up to 1,050,000 tonnes of ore (the maximum permitted amount), will be mined, shipped & toll-milled next door at Zapadnaya Gold’s Alexandrovskoye (“Alex“) mill. Zapadnaya operates three mines in Russia with total annual production of 106,500 ounces.
A gold junior in a bull market with 1.42M ozs., that no one has heard of
If successful, this trial mining operation will generate free cash flow to explore & expand the 1.42M oz. resource. The goal is to reach 2.5-3.0M ounces in 2022 from just half of Orsu’s ten identified gold occurrences.
In addition to resource expansion, Orsu plans to deliver a Preliminary Economic Assessment (“PEA“) and/or a Pre-Feasibility Study (“PFS“), without the need of additional equity raises. It’s not yet clear how much cash flow to expect from this toll-milling exercise. Management is still negotiating terms with Zapadnaya. However, there will be a profit split involved, so the gold price up +40% (at an all-time high in US$) from its 52-week low is great news for Orsu.
Orsu Metal’s project is between two open pit mines. Zapadnaya owns the operating Alex mine, < 10 km west of Orsu’s Sergeevskoe, and China National Gold Corp. owns a majority interest in a past-producing mine < 2 km east of Orsu. China Gold has a 70% interest in the Klyuchevskoe mine (30% is held by Indian conglomerate Sun Gold Ltd.).
The Klyuchevskoe mine was operated sporadically for over a century, most recently from 1977 to 2002. During that period ~8.9M tonnes of ore was milled at ~1.7g/t Au. When the mill was decommissioned 18 years ago, the inflation-adjusted gold price was ~$475/oz. vs. $1,940+/oz. now. Think about that, today’s price is four times higher, even after adjusting for inflation!
Russia risk? Russia + U.S., not so good, Russia + China, better!
Some readers are wary of Canadian companies with mining projects in certain countries, including Russia. Russia and the West (mostly the U.S.) have a history of distrust that may not improve anytime soon. Be that as it may, Russia is a major gold producer. And, according to Nikolay A. Goryachev of the Russian Academy of Sciences, “The Russian Far East is host to a huge gold endowment and has produced more than 6,500 tonnes of gold, since the 1860s.”
Ongoing issues with the West has driven Russia closer to China. I argue that Russia’s ties with China are as important, or more so, than its relations with the U.S. This Russia / China sentiment is not new. In 2017, the Russian State-owned Far East Development Fund partnered with China Gold to invest US$1 billion into developing gold projects & infrastructure in Russia & the Far East.
Earlier this year bond ratings firm Fitch Solutions released a report that said,
“The rising risk of Russian State banks being frozen out of dealing in U.S. dollar-denominated assets as bilateral relations remain strained, is pushing the Russian central bank to increase its holdings of gold.“
Russian investors & the government are actively looking to invest in hard assets, including gold & silver projects / companies, to diversify away from US$ denominated assets. In fact, the same can be said of Chinese investors / the Chinese government!
Is Orsu Metals a takeout Candidate? Yes, but not before 2021 or 2022
If one believes, as I do, that Orsu Metals will likely be acquired, then buying shares could be a great way to benefit from low-cost resource expansion during a precious metals bull market. Management believes it can delineate another 1.0-1.5M ounces through additional drilling at under $5/oz. In a bull market, even pre-revenue companies can get acquired for $40-$60+/oz.
In the same report, Fitch forecasts Russia’s gold production to rise from 11.3M ounces in 2020 to 15.5M in 2029, moving it decisively into second place (currently 3rd) behind China. Over the same period, China’s production is expected to grow by just 0.3%/yr. China needs Russia’s gold.
Both China & Russia, and investors active in those countries, should care a lot about a 2.5-3.0M ounce, near-surface gold resource @ 1.45 g/t. A resource that would still likely be open at depth, with half of the ten existing gold targets largely unexplored.
What might 2.5-3.0 million troy ounces in Far Eastern Russia be worth? Since there are two large neighbors — one very, very large, the other smaller but currently in production — the remoteness of the resource is less of a concern.
In valuing Orsu’s project, I assume that 60% (1.5M) of the prospective 2.5M ounces is Measured & Indicated and the remainder (1.0M) is Inferred. I give the Inferred ounces a 50% haircut, so 2.5M total ounces can be viewed as a 2.0M ounce (adjusted) resource.
Next, take 90% of that figure (Orsu owns 90% of the project) to get to 1.8M (adjusted) near-surface ounces. In looking at pre-production, gold exploration & development companies with resources under 4.0m Au Eq. ounces, grading below 4.0 g/t Au Eq., EV/ounce values (Haywood Securities) range from $5 to over $100/oz. Eliminating the highest valuations (companies well more advanced than Orsu), the average EV/oz. is more like $10-$40/oz.
Taking the mid-point of that range, [$25/oz. x 1.8M adjusted ounces x CAD$:US$ FX 1.35:1.00] = ~C$60M. Divide that by 48.1M fully-diluted shares = C$1.24/shr., in 2-3 years. Discounting that back three years at a 15% discount factor = C$0.82/shr. This is NOT a price target or a valuation, it’s meant to walk readers through the calculations.
Reasons Orsu’s resource might be worth > $25/oz. in 2-3 years
I strongly believe that global M&A for precious metal projects / companies is going to soar. If bidding wars erupt, like the recent one for Guyana Goldfields, (China’s Zijin Mining outbid two others) sector valuations will rise.
Instead of the current range of US$10-US$40/oz., in two years’ time the range could easily be $30-$120/oz. If one agrees that we’re in a precious metals bull market, a rising tide lifts all boats! Orsu’s potential multi-million-ounce resource is near-surface with a gold value of 1.45 g/t Au, an attractive grade for an open pit operation, especially if heap leaching is a viable option.
Orsu might be sold before needing to raise major funding, before years of permitting & construction. Therefore, although early-stage (pre-PEA), the Company’s level of risk is less than most early-stage companies. Raising equity & project funding capital is one of the biggest challenges that juniors face. If all goes reasonably as planned, Orsu could get through a PFS without further equity dilution. Very few junior miners are in the same advantageous position.
There’s considerable execution risk over the next several months as the trial mining operation unfolds. Plenty could go wrong, it is mining after all. If progress is slower than expected, cash flow generation would disappoint. That could mean less exploration / resource growth, and/or the need to raise equity capital, perhaps at price lower than today’s C$0.38.
Trial mining / toll-milling 1,050,000 tonnes of ore is a game-changer….
I mention risk factors because the Company has not done a NI 43-101 compliant PEA or PFS. Instead, it delivered a Russian technical study that received approval from the requisite Russian mining authorities. The approval is for extraction of up to 1,050,000 tonnes of mineralized material, over up to three years, from the North & South trial open pits to a depth of 30 to 35 meters.
Management believes that all remaining permits will be issued shortly. Orsu has been granted a permit to produce and sell up to 700 kg (22,505 troy ounces) of gold/yr. Pilot mining is planned to begin in the next 30 days. Orsu expects an average grade of 1.6 g/t gold.
Trial mining will attempt to establish essential elements of the project including an optimal flow sheet, mine plan, attractive recoveries and an understanding of mining loss & dilution metrics. Orsu expects to generate positive free cash flow from trial mining to fund exploration of its deposit with minimal, if any, additional further equity dilution.
Armed with valuable, real-time mining flow sheet data, most notably info on recoveries and efforts taken to optimize recoveries, Orsu will be an ideal satellite deposit of (hopefully) 2.5-3.0M Measured, Indicated & Inferred ounces of gold by 2022.
China National Gold, Sun Gold Ltd. and Zapadnaya are likely to be interested in Orsu, not to mention two other Chinese giants who’ve been actively acquiring precious metal projects around the world — Zijin Mining & Shandong Gold.
Nor should readers ignore Russian Majors Polyus, Polymetal Intl. plc or mid-tier producer Petropavlovsk. Or Canadian-based Kinross Gold, for that matter, as potential bidders for Orsu Metals. Kinross has a 25-yr. history in Russia, currently operating two mines that produced > 500k gold equiv. ounces at < US$600/oz. in 2019. Two others, Highland Gold Mining Ltd., a C$2.1B / 300k ounce/yr. company, and Trans-Siberian Gold, operating the 50k oz./yr. Asacha Gold Mine, are active in far east Russia.
That’s 11 companies with strategic reasons to care about a multi-million-ounce, far east Russian gold resource that has good metallurgy and (hopefully) demonstrated logistical viability. And, those are just some of the publicly-listed names. There’s a handful of private Russian gold-silver companies that could also be interested. Orsu Metals Corp. (TSX-V: OSU) / (OTCQB: ORSUF) is unknown to most investors, but that will change as the Company continues to de-risk its highly promising project.
Disclosures: The content of this article is for information only. Readers fully understand and agree that nothing contained herein, written by Peter Epstein of Epstein Research [ER], (together, [ER]) about Orsu Metals, including but not limited to, commentary, opinions, views, assumptions, reported facts, calculations, etc. is not to be considered implicit or explicit investment advice. Nothing contained herein is a recommendation or solicitation to buy or sell any security. [ER] is not responsible under any circumstances for investment actions taken by the reader. [ER] has never been, and is not currently, a registered or licensed financial advisor or broker/dealer, investment advisor, stockbroker, trader, money manager, compliance or legal officer, and does not perform market making activities. [ER] is not directly employed by any company, group, organization, party or person. The shares of Orsu Metals are highly speculative, not suitable for all investors. Readers understand and agree that investments in small cap stocks can result in a 100% loss of invested funds. It is assumed and agreed upon by readers that they will consult with their own licensed or registered financial advisors before making any investment decisions.
At the time this article was posted, Orsu Metals was an advertiser on [ER] and Peter Epstein owned shares in the Company.
Readers understand and agree that they must conduct their own due diligence above and beyond reading this article. While the author believes he’s diligent in screening out companies that, for any reasons whatsoever, are unattractive investment opportunities, he cannot guarantee that his efforts will (or have been) successful. [ER] is not responsible for any perceived, or actual, errors including, but not limited to, commentary, opinions, views, assumptions, reported facts & financial calculations, or for the completeness of this article or future content. [ER] is not expected or required to subsequently follow or cover events & news, or write about any particular company or topic. [ER] is not an expert in any company, industry sector or investment topic.