The following interview of MD, Mark Papendieck of Orinoco Gold [OGX:ASX] was conducted by Peter Epstein, CFA, MBA in the week ended July 20th. Orinoco Gold is an interesting gold junior with a soon to be producing mine in the Brazilian State of Goias. Without further ado, let’s jump right into the interview (that rhymes). NOTE: Click here for bios of [Management & Board members]
Please describe Orinoco Gold (OGX:ASX) in a single paragraph.
Orinoco Gold (OGX:ASX) is an Australian listed, high-grade gold developer and explorer with a dominant land position in the Faina Greenstone Belt, in the central Brazilian State of Goias. The Greenstone Belt has been under-explored, despite hosting a past producing high-grade gold mine (Sertão 250k oz production at 25 grams/ tonne gold, “Au,” now owned by Orinoco). Due to the coarse nature of the gold occurrences in the belt, conventional sampling is difficult and costly. Orinoco is developing its high-grade, low-cost Cascavel Gold Mine, with first production from the gravity processing circuit expected in 1st quarter, 2016. The development of Cascavel is the first stage of turning the Company’s Faina Goldfields project into a high-grade, multi-mine operation.
What makes the Cascavel project so exciting despite the lack of a JORC Mineral Resource report?
In the Faina Goldfields Project, Cascavel will be our maiden mine, again scheduled for first quarter, 2016. It’s an elongated mineralized belt in which Orinoco has recently made important discoveries including Cascavel (15 m @ 88g/t Au from underground sampling) and Tinteiro (17.5 m @ 1,293g/t silver,”Ag”). These discoveries illustrate very significant potential in Orinoco’s tenements. This would be above and beyond the imminent production from Cascavel.
Cascavel’s development path requires further cap-ex of a US$ 7 million. Orinoco is poised to demonstrate just how profitable the Greenstone Belt can be. The past producing Sertão Gold Mine, now owned by Orinoco, had a shallow oxide zone mined by Troy Resources in 2003. At the time it was the lowest cost gold mine in the world with cash costs of US$ 53 an ounce!
At Cascavel, the mineralized structure hosting the gold has been intercepted in widely spaced drilling over 1.5 km of strike and over 700 m down dip. The system remains open along strike and down dip, and additional gold lodes parallel to (above and below) the main zone have been discovered. These parallel gold lodes are not part of our initial mine plan. This is a large system!
The structurally controlled and geologically continuous nature of the gold vein system, combined with the drilling and underground sampling completed at Cascavel, would ordinarily allow for a JORC Mineral Resource. While drilling provides an effective measure of the geological continuity of the Cascavel veins, the coarse nature of the gold prevents a reliable grade estimation amenable for JORC purposes. Given the difficulty and expense of defining JORC compliant resources through drilling, the Company is of the view that establishing a low-cost gold operation, and rapidly growing it, is the best way to create shareholder value and mitigate risk.
So, why is Cascavel so exciting? It’s a large gold system with 90% gravity recoveries, Bonanza grades, very low remaining capital costs, expected to have low operating costs, reaching production in the first quarter of next year. [Please see more detail on the Cascavel project].
Brazil is not the first place that comes to mind when thinking about gold producers. What’s it been like working there and what could still go wrong?
Although not many people have heard of it, Goias State, where our Faina Goldfields Project is located, is actually the second largest gold producing State in Brazil. Large companies such as Anglo Gold, Kinross and Yamana have successfully operated there for years. It’s a great State to operate in, without the logistical issues and environmental sensitivities that come with more remote parts of Brazil. We benefit from a mining friendly government, evidenced by the fact that we went from discovery to mine development in under three years. A skilled labor force and supportive set of local communities doesn’t hurt either.
What could go wrong? Well, we carry advanced-stage development mining risks, but it doesn’t look as if any surprise, ‘Brazil’ risks will come to pass. [Famous last words?] When one looks at the projects that have succeeded and failed in Brazil – they’ve done so mostly on the merits of the projects and management teams – not sovereign Brazil factors. Additionally, the local currency has devalued very significantly against the U.S. and Australian currencies, helping to lower our costs. Many don’t recognize that locally priced gold close to all time highs.
Are there other jurisdictions with high-grades that you might consider expanding into?
At this point we think our property, with a 100 km radius, has sufficient scope for discoveries that could make Orinoco a meaningful mid-tier producer over time. We have a Heads of Agreement in place with the State Government and a highly prospective land package. We hope to leverage our strategic advantages and the infrastructure associated with our first gold mine, Cascavel.
Is the Company fully funded to reach production, retaining a margin for error?
We are fully funded to take Cascavel into production. As all of our mine development is on the orebody, for every tonne of dirt we move, every dollar spent on underground development, will have a revenue component. When the plant is commissioned, Orinoco will have an existing stockpile to treat, allowing us to gradually ramp up to full capacity of the plant of roughly 100,000 tonnes per year.
Regarding funding, we entered into a forward gold sale agreement with Cartesian Royalty Holdings leaving us with over US$ 6 million undrawn and US$ 3.5 million in the bank. This facility is quite flexible, we don’t have fixed interest rate or gold deliveries to make, rather we must deliver 20% of our production to Cartesian for the next three years (subject to a minimum of 16k oz and a maximum of 24k oz).
Orinoco Gold’s trailing 3 month trading volume is increasing, now standing at ~500k shares. On July 15th, more than a million shares traded hands. Is Orinoco attracting a new set of investors?
We hope so, a fully funded Cascavel Mine alerts investors to the potential here. Add to that the meaningful upside at the Faina Goldfields Project to host additional high-grade gold deposits. This is a perfect time for us to be introducing the Orinoco story to a new set of global investors, which is exactly what we are doing.
Everything appears to be on track. Besides real or perceived country risk, what are the two biggest risks facing the Company?
Although both the gravity plant and room and pillar mining operation are technically very simple – this is still a mining operation and things can certainly go wrong. At the moment, the biggest risks lie in execution. Little things like the importation of the gravity circuit into Brazil and making sure that we have adequate spare parts on site are things that keep me awake at night. We have done significant metallurgical testing so we’re pretty comfortable that we can get 80-90% gravity recoveries. With over 8,000 m of drilling completed in and around the initial mining area at Cascavel and several hundred meters of underground workings sampled, we feel there’s the potential for plenty of high grade gold in the initial mining area at Cascavel.
How much capital has been deployed on this property over the years?
Prior to commencing the development of the Cascavel Gold Mine and processing plant, we spent on the order of $12 million getting Cascavel to the stage where we were comfortable to invest a further $7 million in turning our discovery into a mine.
Do you believe your Company’s valuation might be hindered by it being solely listed on the ASX?
That’s something we look closely at all the time. At the moment, there’s no doubt that being ASX listed is a positive in the sense that quality gold developers and producers are being recognized and rewarded for their achievements. Aided by a good understanding of the positive effect that a depreciating currency like the AUD or the BRL has on the locally denominated gold price. On the flip side, there’s no doubt that North American markets understand South America better than Asian markets. As the Company continues to grow we will monitor the appropriate places to maintain a listing.
Speaking of valuation, most CEOs believe their companies are undervalued. Any thoughts on that subject?
I think the market is beginning to recognize the potential of Cascavel. We don’t appear to be getting attributable value for the potential upside there and at nearby prospects. This is something we are addressing at our Sertão Gold project by obtaining a JORC Mineral Resources report. Sertão is on a fully permitted Mining Lease, and although the gold there is coarse, it’s not as coarse as Cascavel, leading us to believe that we can establish a resource inventory at Sertão.
Clearly, if we can demonstrate the potential of Sertão to also host significant high-grade resources only 28 kms away from our Cascavel processing plant, that should show the market blue-sky potential of our overall property. After we drill Sertão we have two other targets ready to test for potential development over time. We really think the market should begin to recognize that there’s a good possibility that we’re not a single mine Company. We believe our existing land package has the potential to become a significant Gold Camp with several mines. Of course it’s early days in that regard, but reaching production should shed a new light on our valuation.
Would you like to address any misconceptions about Orinoco Gold?
Yes, investors should avoid confusing short term, low-cost production at Cascavel with the idea that Cascavel must be a small mine. The area of known mineralization at Cascavel is large. As is case with many high-grade, coarse gold mines, the most prudent way to mine these systems is to start modestly and grow steadily. We are confident that the mine can feed the plant’s capacity with +12g/t mill feed and it’s just a matter of sensibly ramping up to that throughput. From a steady state, we can add a leach circuit, reduce bottlenecks or add processing plants, if the potential economics from targets such as the past producing Sertão project warrant it.
Thank you Mark for your time. I look forward to watching your progress and wish you good luck.
Orinoco Gold (OGX:ASX) – This article was written by Peter Epstein, CFA, MBA. Orinoco is highly speculative and not suitable for all investors. Readers should consult with their own investment advisors before making investment decisions. Mr. Epstein is not a licensed investment advisor. The article should be viewed in this context. The opinions and assumptions are solely that of Mr. Epstein. At the time this article was written, Mr. Epstein, CFA, MBA owns shares of Orinoco Gold. Orinoco is a sponsor of EpsteinResearch.com.