Orosur Mining's strategy remains on track as targets higher grade ore

Tapping into the higher grade ore at its flagship San Gregorio mine in Uruguay is a vital part of Orosur Mining's (LON:OMI) future growth.

This is because it is key to the gold producer's need to cut operating costs, maximise its cash position, and improve efficiency at the mine, explains chief executive David Fowler.

And vital to its goals is the completion of building a ramp to the underground Arenal Deeps part of the mine - construction of which is on track before the end of February this year.

The San Gregorio mine lies in the historic Minas de Corrales district, encompasses several deposits and has an open pit as well as the underground mine.

The ramp will be a real game-changer for operations, Fowler tells Proactive.

"In the underground (section) a lot of the ore that has been produced up to now has been coming from development work, which is higher cost, and also from the pillar stopes, which are lower grade.

"In February 2013 we will complete the development of the ramp, which then gives us access to transverse open stopes that are higher grade and less expensive to produce from," he said.

The company has been steadily progressing but its operational performance stumbled last year for a variety of reasons.

The next phase of the firm's development could reinvigorate investor interest in a company, which operates Uruguay's only gold mine.

The current year (to May 2013) has been one of "consolidation", the firm says, and has seen management changes and a refocus of aims.

The extra cash flow from producing this higher grade material and getting rid of the costs associated with the upgrade at Arenal Deeps as well as the rest of the mine will put the firm on a different footing, so that it will be a lower cost producer during the three years to May 2016, explains Fowler.

Importantly for investors, cutting costs also means the company can reach some key milestones - namely a return to shareholders in the form of a dividend, and start the search for new gold assets.

To illustrate the point, Fowler says that capital expenditure (to develop the mine) for the year to May 2013 of US$24 million, will drop down significantly in the following financial year once Arenal Deeps development is complete and as San Gregorio pre-strip has been anticipated to this year.

"Just from this alone we will be generating a lot more cash flow and be in a position of producing similar or more production at targeted lower cash costs," says Fowler.

The plan is to then return at least one-third of the firm's free cash flow to shareholders – through a dividend - starting in January 2014.

This free-cash flow also offers Orosur the chance to invest in more assets - creating an even more secure base and Fowler says he would be looking at gold acreage in Latin and Central America.

"We've seen a lot of value come off in the market over the last 12 months," he notes, referring to any potential purchases.

The plans for San Gregorio are comprehensive enough but the Orosur story doesn't stop there as it has plenty of exploration on the cards.

Within the next six months, the firm says it will be drilling new defined targets at its Anillo copper and gold project in northern Chile.

At another of its three gold properties in Chile - Pantanillo - Fowler says the new season will see geophysical work carried out to define targets with drilling earmarked to start from June this year onwards.

The company has now earned 100% of Pantanillo from giant Anglo American (LON:AAL) and a new preliminary economic assessment (PEA) in June last year lowered the estimated cash cost of producing gold to US$568 per ounce from US$581, and increased the net present value (NPV) of the site to US$49.7 million from US$32.2 million.

Orosur expects to spend US$4 million on assessing the potential of these two projects in the year to May 2013 - all from the increased cash flow from operations.

Also ahead for the second half is a maiden NI43-101 resource at the Mahoma property in Uruguay, which is expected to support the beginning of feasibility work.

The firm recently reiterated it expects to meet its production target for this financial year despite hitting lower grades than expected at one pit in its latest quarter.

Orosur increased production from its San Gregorio mine in Uruguay by 17% to 13,970 ounces of gold in the three months to November compared to a year earlier.

Ore mined from the Crucera pit was of a lower grade than planned, resulting in lower ounces produced and higher cash costs per ounce at that pit.

But Orosur said it remained on track to achieve its forecast production target of 63,000 to 68,000 ounces for the full year following the improvements undertaken in Crucera in December.

Analysts at City broker Seymour Pierce Asa Bridle said: "We remain positive on Orosur, which looks heavily discounted against its peers on all metrics.

"We take comfort from the overall performance of the company’s operations in the first half and the board’s guidance that the second half will see the situation continue to stabilise and improve as outlined in October 2012," he said.