The broker has launched coverage on Uruguay and Chile-focused Orosur with an 85p price target.
Key to this valuation is the development underway at San Gregorio, Uruguay’s only producing gold mine.
This includes the ramp-up of the Arenal Deeps portion of the project, which is slated for completion during the third quarter of fiscal 2012/2103.
This will open up higher grade and lower cost production and will significantly reduce capital expenditure. Existing output is coming from the lower grade room and pillar stopes.
Orosur also said it will advance existing projects at Anillo, Pantanillo and Talca in Chile to what it described as the commercial assessment stage.
Seymour Pierce said the current year should bring a period of consolidation. Production in 2012/13E is forecast at 63,000-68,000 ounces (oz) at an operating cash cost of approximately US$975/oz.
A revised mine plan will now see accelerated development during the January to May period of 2013, squeezing short term cash but lowering capital requirements in the following three years.
Through to end of May 2016, production from San Gregorio will range between 60,000-70,000 ounces a year at an average cost of US$810/oz.
Assuming the gold price remains firm, the company believe this should allow the payment of dividends equating to at least one-third of free cash flow
At the same time the company will conduct exploration and development work at San Gregorio targeted at maintaining a minimum three year life of mine at all times.
While there is no guarantee of success on this front, the San Gregorio mine has had a three to five year tangible life of mine for the last 15 years.
Seymour Pierce compared Orosur Mining’s intrinsic value to its peer group of 21 London listed gold producers using three standard financial metrics and three mining metrics.
Applying this six metrics approach produced a value ranging from 85p/share to 472p/share, but rather than use the mean value of 269p it has taken what it says is a more appropriate bottom of the range number as Orosur still has to deliver on its objectives especially after delays and cost over-runs at Arenal Deeps and the new tailings dam.
“We believe Orosur Mining represents one of the lowest priced gold producers currently listed in London and hence is an exciting investment opportunity,” the broker concluded.