Orosur Mining looks to Chile and Arenal Deeps

South American focused gold miner Orosur Mining has had its fair share of ups and downs at its San Gregorio gold mine in Uruguay, but a recent acquisition in Chile with a pair of exploration projects and confirmation of the underground potential in Uruguay have introduced growth back into the company.   Orosur is trading at less than the cash backing of its liquidation value.  Its growth options in Chile and the potential to reduce cash cost and increase mine life in Uruguay were recently noted by House broker Matrix, who set a 12-month price target of 77p as the company’s options are firmed up in the coming months and news flow increases.

The AIM- and Toronto-listed company’s current operational mine at San Gregorio, Uruguay is generating cash - but only just. Recent third-quarter results show that 12,742 ounces were produced in a rain-affected three months to end-February – in accordance with expectations, said the management, but lower than the 19,371 produced in the same period last year. A bitterer pill was that average cash costs rose to US$984 per oz, well above the $547 average from the comparative period last year. However, as the gold price has gone from strength to strength, the company sold for an average of $1,100 per oz, yet the period saw a $2.35m net loss from revenues of $13.2m. For the 9 months to February so far, Orosur has mined 39,495 at a cost of $910 and against a selling price of $1,026 per oz. There remains $7.2m of cash on the balance sheet, with negligible debt.

Although these results are disappointing on paper, CEO David Fowler stressed at the company’s results presentation the impact of the weather. ‘It’s important to recognize that during the last six months there’s been close to 1,700mm of rain and this has had an impact on our ability to be able to mine some of the higher grade areas so we’ve mined and processed the lower-grade areas and this is reflected in cash costs and profitability in the last six months.’

The fourth quarter is well under way and Fowler and his team, with higher grade areas now more accessible, are anticipating the last quarter will yield 15,500-18,000 oz and, as such, they say they remain ‘on track’ to achieve the production target for the year to May of 55,000-57,500 ounces at an average cash cost across the year of $825 per ounce.

Growth in Uruguay: Arenal Underground, Iron Ore and diamonds

Arenal, one of the San Gregorio project’s three major pits, has given its all as an open-pit mine, but in March Orosur announced it has identified an underground resource there, which it is calling ‘Arenal Deeps’. At a 1.5 grammes per tonne (g/t) cut-off, the new resource resulted in a measured and indicated resource of 2.14 million tonnes at 3.61 g/t of gold for a total of 249,000 contained ounces of gold that has, says Fowler, ‘the potential to grow’. He believes the company could produce ore there for a cash cost of $500 per oz.

Engineer AMEC has begun work on a feasibility study that should be complete by the end of September at the latest. Fowler confirms that ‘development of this resource is expected to progressively reduce cash costs and extend mine life’. A planned start to development would then begin straight after the study is finished, with the planned start of open stope production being the first calendar quarter of 2011 and full open stope production planned for the second or third quarters.

House broker Matrix agrees that the development of Arenal ‘could see mining costs reduced, production increased and the project life extended, all for a small capex of some $8m’. Analyst Brad George believes that the existing plant and infrastructure around San Gregorio and Arenal could therefore become ‘a small cash cow’ for the remaining years of the mine’s life: ‘we estimate over $200m in operational cash could be generated over the next 7-9 years.’ On an net present value basis he argues that this could be attributed a valuation of some 60p per share, more than double the current share price.

Orosur has a bigger footprint in Uruguay than San Gregorio alone, with non-core diamond and iron ore assets that it aims to realize value from, while it focuses on gold. Fowler has carved out some deals of late to get other groups spending money on these projects.  A joint venture has been formed around the CincoRios Diamond project with Olivut Resources, where additional targets have lately been identified and drilling to test potential kimberlite targets is scheduled to start this April. The iron ore interests have been optioned to Gladiator Resources, with due diligence now ‘well advanced’ and the project aiming to produce higher value pig iron product using charcoal from existing and new plantation timber.

Growth in Chile

Adding some real exploration spice, Orosur, formerly called Uruguay Mineral Exploration, completed the January 2010 acquisition of Toronto-listed Fortune Valley Resources, which inspired its new name and provided access to the twin projects of Pantanillo and Anillo that Fortune Valley had optioned from mining major Anglo American (Pantanillo) and Codelco (Anillo). In its past the former has had 15,134 meters of drilling by Kinross and Anglo American before them. Orosur almost immediately began drilling at Pantanillo in February and all of the first nine holes intersected mineralization, including a pair of holes that intercepted 107 meters at 1.21 g/t of gold from 150 meters and 118 meters at 0.79 g/t of gold from 8 meters. Fowler has appointed AMEC again and he says they will ‘estimate an independent 43-101 compliant resource and complete a scoping study for Pantanillo during calendar 2010’. Exploration work has also commenced at the 30,600-hectare Anillo project in the north, close to Yamana’s El Peñon mine, which produces 400,000 gold equivalent ounces per annum.

Matrix’s George notes that Pantanillo does not yet have a 43-101-compliant resource though Kinross considered it to have the likely potential for between 82–125mt at between 0.83g/t and 0.73g/t Au, equivalent to 2.18-2.95moz. Investors may scratch their heads at why, if Pantanillo is a possible 3 million oz project, how was it bought so cheaply? Matrix’s George believes the primary issue is ‘size and timing’. Anglo American’s interest during the project’s early years as the locality was not a producing region at the time and gold prices were depressed, while Kinross, he understands, determined that the project was unlikely to meet its minimum size criteria and returned the project to Anglo, which is no longer a gold miner.

Conclusion

Although the weaker appearance of the recent third-quarter results sent some investors packing, analyst George says people ‘should not place too much emphasis on quarterlies – the longer term story remains intact’.  Grades vary from quarter to quarter as different ore is accessed, and [Orosur having] only one mine, there are no options to smooth out results.’ Instead he is still confident with the annual guidance.

The recent acquisition gave Orosur access to a potentially company-changing deposit in Chile. Work on this project when coupled with feasibility work at its underground Arenal Deeps deposit in Uruguay, should guarantee a steady stream of news flow, leading to full feasibility studies and 43-101-compliant resources by the middle of the year. 

The company has cash on hand ($7m at the last quarterly report), an operation that is generating more cash and projects on which to spend it.   According to George: “We regard the development of Arenal Deeps as highly likely in the current gold price environment. The addition of this higher-grade material should see the company’s production profile increase above the current level of 55,000oz pa to perhaps 80,000oz pa at a reduced cost per oz, therefore providing a double benefit. Beyond that, should Pantanillo prove to be attractive, it could almost certainly sustain a longterm production profile of at least 150,000oz pa, offering the scope for the company to finally reach the production levels it hoped for in Uruguay.”.