Orosur Mining — Update 15 April 2016

Orosur Mining — Update 15 April 2016

Orosur Mining

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Orosur Mining

A return to profit and delivering on guidance

Q316 results

Metals & mining

15 April 2016

Price

8.38p

Market cap

£8m

US$/£1.41

Net cash (US$m) at end February 2016

2.5

Shares in issue

98.9

Free float

86%

Code

OMI

Primary exchange

TSX

Secondary exchange

AIM

Share price performance

%

1m

3m

12m

Abs

19.6

36.7

(8.2)

Rel (local)

16.3

28.1

0.8

52-week high/low

9.4p

4.9p

Business description

Orosur Mining owns (100%) and operates its San Gregorio gold mine in Uruguay. It also explores for gold close to San Gregorio and further afield in Chile, at the Anillo gold property. It also owns 100% of the highly prospective, high-grade Anzá gold property in Colombia.

Next event

Annual results

August 2016

Analysts

Tom Hayes

+44 (0)20 3077 5725

Charles Gibson

+44 (0)20 3077 5724

Orosur Mining is a research client of Edison Investment Research Limited

Orosur’s Q316 results demonstrate a return to profitability at San Gregorio in line with realistic guidance provided by the company at the start of FY16. Gold production is ahead of budget (27.9koz ytd), making the upper bound of its 30-35koz FY16 guidance look eminently achievable. All-in sustaining costs are, as guided, now below US$1,000/oz (Q316: US$978/oz) and projected to be around this level through to year-end. Cost savings extend to development capex, with San Gregorio Deeps (SGD) due to be mined using Arenal Deeps mining equipment when production ceases at this operation in Q416; associated with this revised plan is that no external funding is required to develop SGD. Orosur has all but repaid its outstanding debts and only has a small (US$0.4m) balance remaining.

Year end

Revenue
(US$m)

PBT*
(US$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

05/14

80.4

4.5

6.6

0.0

1.8

N/A

05/15

65.9

(6.2)

(56.3)

0.0

N/A

N/A

05/16e

42.4

2.8

(0.9)

0.0

N/A

N/A

05/17e

44.1

7.6

5.7

0.0

2.1

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

FY16 production est. to meet top end of guidance

Orosur produced and sold 7,274/oz Au, a q-o-q decrease of 21% (Q216: 9,263oz Au), but in line with budget. The average gold price received was US$1,143/oz and compares to cash operating costs of US$803/oz and all-in sustaining costs of US$978/oz. Company guidance for FY16 is retained at 30-35koz Au at an average AISC between US$1,000-1,100/oz. Only 7,083oz of gold production is required in Q416 to meet Orosur’s upper bound target of 35koz. We therefore expect the company to beat its annual guidance.

Orosur now effectively debt-free

At end Q216 Orosur’s outstanding bank debt was US$0.8m, which has since reduced by 50% to US$0.4m by end Q316 and which will be repaid during Q416. Orosur has an undrawn US$3m credit line available for use.

Valuation: Adjusted for Q316 results and guidance

We adjust our financial model for ytd production data and an estimate of 7,083oz gold to achieve the upper end of its 30-35koz production guidance. We also adjust our model for revised FY17 guidance, from 41.1koz to 35koz of gold produced at an average all-in sustaining cost of production of US$960/oz. We adjust our annual capex estimate from US$5.4m to US$3.5m, bringing this cost in line with the company’s current level of spending. We retain our previous forecast of US$3.2m pa for exploration expenditure. On the basis of these revisions, we reduce our DDF valuation by 7% (due mainly to lower gold production in FY17e) from £0.28 to £0.26 per share, using a 10% discount rate to reflect general equity risk. At a flat gold price of US$1,200/oz, this becomes £0.17.

Our Q416 production outlook and valuation

Exhibit 1 below details Orosur’s production data ytd and provides our estimates of Q416 production, costs and revenues.

Exhibit 1: Orosur’s ytd production data and Edison’s Q416 and FY16 estimate

US$000s

Q116

Q216

Q316

Q416e

FY16e

Gold sales (ounces)

12,471

8,172

7,274

7,083

35,000

Average sales price (US$/oz)

1,147

1,100

1,143

1,248

1,160

Cash cost before taxes (US$/oz)

954

984

803

950

963

Total cash cost (US$ 000s)

12,031

9,115

5,841

6,729

33,716

Sales

14,465

10,190

8,936

8,842

42,433

Cost of sales (excluding depreciation)

(13,201)

(8,336)

(6,809)

(7,113)

(35,459)

Mine site depreciation

(1,814)

(1,814)

(1,378)

(1,378)

(6,384)

Cost of sales (including depreciation)

(15,015)

(10,150)

(8,187)

(8,491)

(41,843)

Gross profit/(loss)

(550)

40

749

351

590

Corporate expenses

(631)

(559)

(474)

(555)

(2,219)

Restructuring costs

(1,114)

(580)

(217)

0

(1,911)

Exploration expenses and write off

(18)

7

(3)

(5)

(19)

Impairment of assets

0

0

0

0

0

Obsolescence provision

0

0

0

0

0

Other net gain (losses)

571

219

3,032

400

4,222

Income (loss) before taxes

(1,742)

(873)

3,304

191

880

Income tax recovery (loss)

16

3

(16)

0

3

Net income (loss) for the period

(1,726)

(870)

3,288

191

883

Basic EPS ($)

(0.02)

(0.01)

0.03

0.00

0.01

Diluted EPS ($)

(0.02)

(0.01)

0.03

0.00

0.01

Source: Company financial statements, MD&A and Edison Investment Research

We expect Orosur to remain profitable through to year end, booking a small profit of US$0.9m, driven primarily by solid production and lower costs, both at the mine and at the corporate level. Profits have also been tempered by the weak gold price and the main phase of company restructuring that occurred during the first half of FY16.

FY17 guidance and outlook

Orosur’s forward-looking production guidance is intimately linked to the prevailing gold price. As such, our assumptions of future production are the greatest risk to our valuation of Orosur’s shares. A key concern is that we consider the San Gregorio mine is now significantly undercapitalised with respect to exploration and replenishing depleted reserves. While cost-cutting has been extensive and precipitated by the gold price over the last 12 months, a sustained gold price at current levels should cause Orosur’s management to seriously consider extending its drilling campaigns at San Gregorio to prove up enough reserves estimated at a low enough gold price (to limit future impairments) to support at least a five-year mine-plan. This would considerably de-risk our valuation, which is based on a short valuation window of FY17-20.

Mining of the Veta Rey open pit will run from April 2016 until August/September 2016 and provide operational flexibility as mining at the underground Arenal Deeps project comes to an end during H117. At that point, all the equipment and labour at Arenal Deeps will move to SGD, which will provide the main body of gold production during H217.

Management guides that production and costs are likely to be at similar levels to FY16, so we have adjusted our production model to reflect this. As a result, production for FY17 is now 35koz of gold produced (cf 41.1koz previously) at an average all-in sustaining cost of c US$960/oz.

Financials

Orosur’s Q316 financial statements include a positive US$2.5m charge to the income statement relating to a settlement with the Uruguayan government over certain tax benefits. Corporate G&A (US$1.7m) and restructuring costs (US$1.9m) total US$3.6m ytd and we forecast the Q316 costs levels to continue until year-end, resulting in a total G&A cost of US$4.3m. Along with mine revenue and operating costs, this drives our end-FY16 net income position from US$0.3m in our update note published on 20 January called to -US$1.0m.

Our end-FY16 and FY17 estimated net cash positions, based on our house gold price deck, are US$3.2m (cf US$2.7m previously) and US$13.1m (cf US$13.5m previously) respectively. Using a flat gold price of US$1,200/oz, these become US$3.2m and US$12.2m, respectively. These projections are based on gold production in FY16 of 35koz (the upper end of the 30-35koz production guidance, which now looks eminently achievable based on gold production ytd) and 35koz being mined in FY17.

Other adjustments to our model are:

annual capex from FY17 to FY20 has been reduced from US$5.4m pa to US$3.5m;

annual central costs from FY17 to FY20 are estimated to be US$2.5m pa; and

we retain our estimate of exploration expenditures at US$3.2m pa.

Santander debt all but repaid

At end Q216 Orosur’s outstanding bank debt was US$0.8m (current plus long-term portions), which has since reduced by 50% to US$0.4m by end Q316. Orosur has now completely repaid US$9m in bank loans as at end Q316. A small debt balance will remain as it relates to the company’s vehicle lease arrangements, which are favoured over rent or purchase due to certain tax advantages. Orosur also has an undrawn US$3m credit line available for use.

Exhibit 2: Financial summary

US$000s

2014

2015

2016e

2017e

31-May

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

80,370

65,868

42,433

44,079

Cost of Sales

(72,905)

(69,715)

(41,843)

(45,360)

Gross Profit

7,465

(3,847)

590

(1,281)

EBITDA

 

 

23,935

10,708

9,798

18,805

Operating Profit (before amort. and except.)

5,197

(5,861)

2,798

7,512

Intangible Amortisation

0

0

0

0

Exceptionals

(869)

(43,164)

(1,930)

0

Other

0

0

0

0

Operating Profit

4,328

(49,025)

868

7,512

Net Interest

(666)

(376)

12

65

Profit Before Tax (norm)

 

 

4,531

(6,237)

2,810

7,577

Profit Before Tax (FRS 3)

 

 

3,662

(49,401)

880

7,577

Tax

1,461

(4,975)

0

(1,894)

Profit After Tax (norm)

5,123

(54,376)

880

5,683

Profit After Tax (FRS 3)

5,123

(54,376)

880

5,683

Average Number of Shares Outstanding (m)

78.1

96.6

97.6

98.9

EPS - normalised (c)

 

 

6.6

(56.3)

0.9

5.7

EPS - normalised fully diluted (c)

 

 

6.6

(56.3)

0.9

5.7

EPS - (IFRS) (c)

 

 

6.6

(56.3)

0.9

5.7

Dividend per share (p)

0.0

0.0

0.0

0.0

Gross Margin (%)

9.3

-5.8

1.4

-2.9

EBITDA Margin (%)

29.8

16.3

23.1

42.7

Operating Margin (before GW and except.) (%)

6.5

-8.9

6.6

17.0

BALANCE SHEET

Fixed Assets

 

 

79,278

34,992

34,733

30,200

Intangible Assets

41,955

18,330

21,555

24,799

Tangible Assets

37,323

16,662

13,178

5,401

Investments

0

0

0

0

Current Assets

 

 

28,410

20,925

8,537

18,638

Stocks

14,254

14,362

3,536

3,673

Debtors

3,338

1,775

1,762

1,831

Cash

10,818

4,788

3,239

13,134

Other

0

0

0

0

Current Liabilities

 

 

(17,919)

(15,073)

(3,026)

(2,912)

Creditors

(13,941)

(13,944)

(3,026)

(2,912)

Short term borrowings

(3,978)

(1,129)

0

0

Long Term Liabilities

 

 

(6,789)

(6,958)

(6,606)

(6,606)

Long term borrowings

(961)

(352)

0

0

Other long term liabilities

(5,828)

(6,606)

(6,606)

(6,606)

Net Assets

 

 

82,980

33,886

33,638

39,320

CASH FLOW

Operating Cash Flow

 

 

22,767

11,753

6,938

16,591

Net Interest

(666)

(376)

12

65

Tax

0

0

0

0

Capex

(13,062)

(12,835)

(7,077)

(6,760)

Acquisitions/disposals

0

0

0

0

Financing

0

0

0

0

Dividends

0

0

0

0

Net Cash Flow

9,039

(1,458)

(127)

9,896

Opening net debt/(cash)

 

 

3,362

(5,879)

(3,307)

(3,239)

HP finance leases initiated

0

0

0

0

Other

202

(1,114)

59

0

Closing net debt/(cash)

 

 

(5,879)

(3,307)

(3,239)

(13,134)

Source: Company accounts, Edison Investment Research

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Germany

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Research: TMT

PSI — Update 15 April 2016

PSI

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