Orusur Mining is a gold producer incorporated and domiciled in Canada. They are duel listed on AIM and the Toronto stock exchange and the company operates in Uruguay, Chile and Colombia. In Uruguay they operate the San Gregorio gold areas where gold is produced in the form of dore which is shipped to refineries for final processing. In Chile they conduct exploration and development activities and in June they reached an agreement with Asset Chile Exploration which enables them to explore the Aniullo rea. In July 2014 they completed the acquisition of Waymar Resources which has exploration properties in Colombia.
The San Gregorio gold mining complex in Uruguay is the only gold producing operation in the country. The company has been exploring in Uruguay since 1996 and acquired the current operation in 2003. Currently they are operating the Arenal Deeps underground mine and several open pits in the San Gregorio district and also have strategic land holdings throughout Uruguay and have active near mine and regional exploration programmes focused on increasing gold reserves.
In Chile the company has an active exploration programme on the Anillo property, optioned from Codelco, the national mining company, located close to Antofagasta in Northern Chile. During the year, an extension of the farm-in contract period was completed until 2020. The company also owns 100% of the Pantanillo property, located in the Maricunga Belt and 25% of the Talca exploration asset located close to La Serena, north of Santiago.
It has now released its results for the year ended 2015.
Revenues declined by $14.5M when compared to last year due to the fall in gold price and the lower quantities of gold sold. In general, cost of sales also fell as a $1.3M growth in mining and transportation costs along with a $1.1M increase in processing costs were more than offset by a $2.1M movement in inventories and a $2.2M fall in depreciation to give a gross loss of $3.8M, a deterioration of $11.3M when compared to 2014. Corporation and admin expenses fell by $598K but this was offset by a $437K fall in other income due to land sales that were not repeated this year and a $552K increase in the obsolescent provision.
We also see a $27.6M increase in exploration write-offs, mainly relating to properties in Chile, and a $14.2M increase in asset impairments which meant that there was a detrimental $53.4M movement in the operating profit. Interest costs more than halved, however, and there were small improvements in the environmental rehabilitation accretion and forex gains. There was a big swing to a tax charge, however ($6.4M) relating to differences in asset valuations following the depreciation of the Uruguay peso, which meant that the loss for the year came in at $54.4M, a detrimental movement of $59.5M year on year.
When compared to the end point of last year, total assets declined by $51.8M driven by a $24.1M decrease in the Chile exploration costs, a $12M fall in development costs, an $8.7M decline in property, plant & equipment, a $6M fall in cash and a $4.9M decrease in the deferred tax asset, partially offset by a $6.9M growth in Colombian exploration costs. Total liabilities also fell during the year, mainly as a result of a $3.5M decline in bank loans. The end result is a net tangible asset level of $16.8M, a decline of $30.4M year on year.
Before movements in working capital, cash profits fell by $13.3M to $10.6M. There was a small inflow of cash through working capital, in particular a fall in receivables, to give an operating cash flow of $11.4M, a decline of $10.7M year on year. The group then spent $5.2M fixed tangible assets relating to the construction of the phase 2b of the second tailings dam, the repair of heavy equipment and new trucks, $2.5M on mine development costs and $5.2M on exploration which meant that there was a $1.5M cash outflow before financing. The group also paid back $4.6M in bank loans which gave them a cash outflow of $6M for the year and a cash level of $4.8M at the year-end.
This year the group sold 52,994 ounces of gold at an average price of $1,232 compared to 61,074 ounces at $1,298 last year, although the sales price in Q4 had fallen to $1,196. Total production was 53,485 ounces with about 55% of the ore mined from the Arenal Deeps underground operation and 45% from several open pits which was a higher proportion from the open pits than expected. While the tonnage of ore processed increased from 920K tonnes to 1.2M tonnes, the grade declined from 2.16g/t to 1.48g/t. Cash operating costs were $912 per ounce compared to $792 last year due to the processing of more ore to offset the lower grades. All in sustaining costs increased from $1,049 per ounce to $1,185.
In Uruguay, during the year the company continued a significant exploration programme, concentrating its efforts in brownfields exploration and in-fill drilling. As a result, at the end of the year, measured and indicated resources in the country totalled 752K Oz of gold at an average grade of 1.18g/t and proven and probable reserves stand at 159K Oz at an average grade of 1.8g/t. While they managed to significantly increase their resources, up 212Oz, the addition of new reserves to replace production was partially offset by taking some reserves off the books as a consequence of using higher cut-off grades due to lower gold price assumptions (net loss of 35K oz).
During the second half of the year, 3,000 metres of in-fill geotechnical and exploratory drilling were completed at the San Gregorio deposit. At the Granulitic corridor, where drilling was focused on, the following projects went through initial phases of exploration: Arenal Este, Rincon de los Castillos and Arroyo Laureles. At Arenal Este, drilling tested the trace of the principal F1 fault that had been delineated last year and similar programmes were carried out at the other two prospects where the main elements of structural preparation, prospective geology and anomalous geochemistry indicated the presence of several targets, although no significant economic results were produced.
The Laureles project has been part of the company’s portfolio since 2003 and after the new geological modelling developed last year, a drilling campaign of 700m was completed in the year to define a new resource model which resulted in 4,400 Oz of new reserves. Since 2013, high grade lenses have been the targets of drilling programmes at Veta Rey and this year a total of 3,292m was drilled resulting in additional reserves of 14,000 Oz. Work in near mine projects with a Tamrock Pentera drill allowed the definition of 5,700 Oz of near-surface reserves at Vaca Dorada, Cross Hill and Veta Guillo. DD drilling was carried out at seven different underground levels at the arena Deeps mine and a total of 3,862m was drilled resulting in 11,000 Oz of new reserves; and at Arenal Repetition, a new underground development of 90m was started at the end of the year to reach a site for an underground drilling station.
At the Anillo project in Chile, the group has until the start of 2020 to complete a bankable feasibility study in order to acquire a 65% interest in the project. A definitive agreement for the funding of the next phase of exploration was signed with Asset Chile which established non-dilutive financing of up to $3.5M to advance the exploration programme. In June, Asset Chile contributed with phase 1 funding of $850K which earns them a 16% stake in the project with options for further funding leading to up to 40%. This phase of the exploration programme includes a geophysics campaign and a minimum of 3,600m of RC drilling with an estimated duration of ten months.
During the year management determined based on the results of drilling activity completed during the year that the carrying value of certain capitalised exploration expenditures attributed to specific were impaired as substantive expenditure or further exploration and evaluation activities in those areas is neither budgeted or planned in the foreseeable future. Of the $27.9M impairment recognised, some $25.5M relates to the Pantanillo exploration project in Chile where there is an NPV of $49.7M at a gold price of $1,250 per ounce but the NPV is negative at prices below $1,095 per ounce. The group have also completed an assessment of the carrying value of its cash generating units and recognised an impairment charge of $14.7M for property, plant, equipment and development costs as a result of the decline in gold prices.
In July the company completed the acquisition of Waymar Resources for 18,466,938 Orosur shares along with some warrants and stock options with the purchase price being calculated as $5.9M.
Obviously there are various risks associated with the group. A 10% fall in the price of gold would reduce profits by $6.5M but it is also worth noting that many costs are incurred in Uruguay pesos and the gold sales are made in dollars so a strong dollar is beneficial for the group (apart from the fact that a strong dollar generally means a weak gold price). As well as currency risks and the gold price risk, the group is also susceptible to political risk. The Uruguayan government have considered a project for a new law regulating big mining projects. It appears that Orosur might qualify as a bit project which would mean they would be subject to additional taxation in cases of high profits but as of the year-end, this law has now been implemented. Nevertheless, this shows the issues of operating in such countries.
At the year-end the group had a net $3.3M in cash along with $6.4M in receivables and inventories (excluding mine operating supplies) with some $13.8M of payables and accrued liabilities. There is also $3M of committed lines of credit with Santander available. A significant decline in the price of gold would meant that the company is required to seek additional sources of funding. Following the construction of the ramp at Arenal Deeps, however, the group does not have the same strong cash requirements for capital expenditure in the next year as it did over the last two years.
In light of the recent and sustained decline of gold prices, recently hitting levels below the company’s AISC guidance of $1,100 and $1,200 per ounce, they have conducted a review of their operating and exploration plans for the year and have consequently implemented a plan designed to reduce costs. The primary objective of this plan is to reduce AISC below $1,000 per ounce.
The company expects AISC of about $1,200 in Q1 2016 but to reduce to about $1,000 for the rest of the year. To accomplish this significant reduction, there will be lower production contribution from the open pits along with cost reduction measures across exploration, development and corporate areas. The revised guidance for 2016 is now production of between 30,000 ounces and 35,000 ounces at AISC of $1,000 to $1,100 per ounce. In the event of a sustained improvement in the gold price, the company has the capacity to significantly increase production.
Overall then this has been a difficult year for the group. There was a big loss and even after the impairments were stripped out, there was a pre-tax loss of $6.8M which was much worse than last year. Net assets also fell along with the operating cash flow which left no free cash – although it should be noted that the company was able to repay quite a lot of debt. Overall there was less gold sold at lower prices of last year. As of Q4, the sales price was $1,196 compared to $1,298 last year. This is a problem as the group’s all in sustaining cost per tonne was less than this at $1,185.
Resources did increase but despite exploration drilling, reserves fell due to the lower gold prices. The lower prices took their toll on many of the group’s assets with the Pantanillo project in Chile experiencing negative NPV at prices below $1,095 per ounce. Now that the Arenal Deeps ramp is finished capex should reduce this coming year but if gold prices fall further then a placing could be on the cards. In conclusion, this does not seem to be the right time to be investing in this company.