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Orca Gold

Orca Gold (CANWF) is a gold explorer that has been slowly creeping upward, which is impressive considering gold hasn't done well in 2017. Management consists of former directors of Red Back Mining, which was a huge success story. The company was bought by Kinross Gold in 2010 for $7.1 billion. With Orca Gold, they have embarked upon another success story and I will explain why this is in this article.

Orca Gold is a gold exploration company, currently in the feasibility study stage for an open pit mine on its flagship Block 14 project in Sudan, which they acquired in 2011 (see figure below). Historic drilling at Galat Sufar South and Wadi Doum returned high grade gold intercepts and resulted in a maiden resource estimate of 2 million ounce deposit at almost 2 g/t gold. This is very high grade for an open pit operation.

At this moment, the company is halfway in executing an additional 25,000-metre drilling campaign which resulted in amazing discoveries. Highlights are 1 m of visible gold at 249 g/t Au & 335 g/t Ag at Galat Sufar South (see figure below). What I really like about this new discovery is that the grade is increasing at depth with shoots of visible gold. We have seen these discoveries before at other mining companies like Newmarket Gold, these increases in grade at depth can quickly result in higher valuations. Newmarket Gold has more than tripled in share price since last year since they found these higher grade intercepts and was bought out by Kirkland Lake Gold. What I also like is that these drill results are not incorporated yet in the upcoming feasibility study which is to be released at the end of the first quarter of 2018. Other highlights are 17.4 m at 7.92 g/t Au at depth. This strengthens the premise that the grades are really improving down plunge and on top of that, these results are impressive in width. So we are probably going to get an open pit mine combined with high-grade underground mining.

So we will see two major catalysts next year. First of all, we will see a higher resource estimate resulting from the current drill program which is halfway completed. On top of that we will have a new bankable feasibility study which will improve the economics.

This should not be underestimated, Orca Gold really started to shoot upwards in September 2017 because that updated pre-feasibility study showed that the after-tax NPV (7%) shot up from $128 million in July 2016 to $227 million in September 2017. That's a doubling of the NPV in just one year time. The main reason for this increase in NPV is that the company found additional water in the nearby aquifer (which was really the bottleneck for this project). So instead of 1.8Mtpa of water in 2016, they found 3.4Mtpa of water in 2017. But the good news is that further drilling at the aquifer showed that the throughput could even be increased to 6.0Mtpa. So that bodes well for the upcoming feasibility study update in 2018. When you add the new high-grade drill holes of November-December 2017 to this mixture, there is a high probability that the upcoming bankable feasibility study will improve considerably. Many of those new drill intercepts were discovered below the current resource.

Moreover, the 2017 pre-feasibility study was based on a gold price of $1200/ounce. If we take a gold price of $1300/ounce, we would be closer to the $300 million NPV. At a market capitalization of only $80 million, this company is a real bargain. The share price should be at least double the current market price. Furthermore, the U.S. has recently revoked sanctions on Sudan in October 2017. So political risk has been substantially decreased and will spur foreign investment demand.

I expect that somewhere next year, financing will come in as the company has seen interest from sovereign funds and Arab investors in particular. Construction will start by the end of 2018. Orca Gold might even get bought out when the bankable feasibility study is positive. Capital costs are around $300 million for the 6.0Mtpa throughput, so this is a manageable cost considering the company is valued at $80 million (and will probably be higher when the bankable feasibility study is out). 

Other than the Block 14 project, Orca Gold is also drilling at its other exploration assets in the Côte d'Ivoire, which will add to the resource potential of this company.

The conclusion is that you are buying a gold exploration company that is already undervalued when you look at the current pre-feasibility study and is about to significantly improve this in the upcoming bankable feasibility study. Recent insider buying by CEO Richard Peter Clark in October 2017 suggests that things can't go better and these are pretty large purchases ($63,461).

Of course, there are risks in buying exploration companies. The company has net losses of around $3 million per quarter and at June 30, 2017, the company had a treasury of $9.6 million. It recently did a private placement of $15 million so they should be fully funded for next year. The company also depends on higher gold prices to flourish and gold has really underperformed in 2017. Other than that, Sudan is still a country that is perceived to be high in political risk.

This post first appeared on Correlation Economics, please read the originial post: here

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