UPDATE: Orosur Mining making ‘good progress’ as it lays foundations for future

--adds broker comment and updates share price--

South America-focused Orosur Mining (LON:OMI, TSE:OMI) revealed that “good progress” was made at the Mahoma and Pantanillo gold projects in the latest quarter.

The gold miner also said that the past year was a challenging one, but it has now “laid much of the foundation for the future success of Orosur”.

Drilling at Mahoma in Uruguay confirmed the potential to delineate a high grade ore source that could extend the mine life at San Gregorio, the country’s only producing mine.

Plans for a further 4,500 metres of drilling for the rest of the year are in place to define a NI 43-101 resource.

Meanwhile, drilling at Pantanillo, located in the prolific Maricunga District of Chile, confirmed the potential for additional oxide resources.

The gold miner added that the preliminary economic assessment (PEA) showed the potential for Pantanillo to develop into a production asset.

Results included 3 metres at 17.2 grams per tonne of gold and 6 metres at 1.03 g/t.

While revenues for the full-year to 31 May grew to US$93.7 mln in 2012 from US$78.7 mln, helped by an increase in the realised gold price (up to US$1,656/oz from US$1,347/oz in 2011), the cost of sales rose to US$78.3 mln from US$52 mln the year before.

This meant the company only made pre-tax profits of US$3.8 mln compared with US$16.2 mln in 2011.

Gold production was flat with 55,458 ounces produced in 2012, while operating cash costs also went up last year.

“The last year has been challenging as we have laid much of the foundation for the future success of Orosur,” said chief executive David Fowler.

“We plan for 2012/13 to be a year of consolidation. We have introduced changes to management and the board, are controlling our costs, and are refocusing the company’s management and resources on delivering results from San Gregorio and on extending the mine life, whilst advancing our existing Chilean projects.”

The company, which has assets in Uruguay, Chile and Argentina, forecasted production for 2013 of between 63,000 and 68,000 ounces at an operating cash cost of around US$975 per ounce.

However, given the capital expenditure programmes that need to be completed next year, Orosur tempered investor expectations by admitting its cash flow generation would not be as strong as initially anticipated.

“Thereafter we anticipate that we will generate significant operating cash with lower levels of capital for the three years to 31 May 2016,” added Fowler.

The company will be assessing its strategy of how best to use this cash flow to maximise shareholders returns, with a dividend policy expected to be unveiled in September.

Broker Canaccord Genuity says the expected improvement in grades delivered to the mill from the Arenal Deeps should help to mitigate some of the industry-wide cost pressures and support a reduction in cash costs towards US$800/oz by 2014.

Canaccord analyst Dmitry Kalachev said: “This together with a potential reserves replenishment at San Gregorio (to keep mine life at 4-5 year level in line with the historic replenishment rate) should support rerating closer to the peer group average valuation multiples (price to net asset value average of 0.58x against 0.28x for Orosur).”

As a result, Kalachev cuts his target price to 75 pence from 84 pence but retains a ‘buy’ recommendation.

Shares fell 10.5 per cent to 39.5 pence.