Orosur Mining (BUY) – 3Q FY17 results: San Gregorio West ramps up after successful transition completed
OMI LN (14.2p, TP 44p), Market Cap: £14.1m
Our view: Today’s 3Q FY17 results provide further evidence of the successful transition OMI has made at its underground operations in Uruguay, and the commitment the company is making to extending the mine life at San Gregorio and to exploration at the Anza project in Colombia. 3Q FY17 was the first full quarter of production at the company’s new San Gregorio West underground mine with 60% of the quarter’s total production of 7.8koz (+14% q-o-q) coming from the new mine while costs fell 6% to US$858/oz as the operation continues to stabilise. Revenue was impacted vs. 2Q FY17 by a lower average gold price (-4.3%), but the company remained profitable and the ytd profit and cash flow, at US$4.1m and US$8.7m respectively, are 755% and 47% ahead of 9M FY16. The company has reiterated its previous annual production and cost guidance at 35-40koz of gold at cash costs of between US$800-900/oz. From year to date production of 24.6koz at US$803/oz, the company clearly expects a further pickup in the production rate in 4Q FY17 and looks comfortable on costs. While we will need to review our FY17 estimates as we head into the final quarter, OMI’s positive direction of travel is clear. Furthermore, the remainder of CY17 should bring some significant news flow for the company from both Uruguay and Colombia. We reiterate our BUY recommendation and TP of 44p ahead of finalising new estimates.
- 3Q FY17 summary – The company produced 7.8koz gold (+14% vs. 2Q FY17) at an average cash cost of US$858/oz (-6%) with 60% of production coming from the new San Gregorio West underground mine. Gold sales generated US$8.8m of revenue, resulting in net profit of US$0.36m and operating cash flow of US$1.67m.
- 9M FY17 summary – At the end of Feb-17, 9M gold sales stood at 24.6koz (-11.8%) at an average price of US$1,263/oz producing revenue of US$32.3m or -3.9% vs. 9M FY16. However, net profit was 755% higher at US$4.1m due to a 18.5% drop in cost of sales (cash costs of US$807/oz). EPS was 4.0c vs. 0.0c. After capex of US$8.8m and exploration spend of US$1.6m, net cash stood at US$2.2m at the end of the third quarter (vs. US$5.2m after 1H FY17). The company has reiterated its full year production and cost guidance at 35-40koz and US$800-900/oz respectively. Prior to today’s update we were forecasting sales of 36.6koz gold and total operating cash costs of US$844/oz.
- Uruguayan exploration – The company is seeking to add reserves at the SGW UG operations and evaluate three neighbouring underground projects, the SG East UG, SGW UG Deep Extension and the SG Central UG areas. A comprehensive and extensive drilling campaign is currently being carried out at San Gregorio. During FY17, a total 9,000m is planned with 6,000m completed so far.
- Colombian exploration – While the company finalises its plans for a significant drill campaign on the property to outline an initial resource, OMI has now taken over as operator of the small, existing gypsum mine on the project. The company believes that the production parameters associated with the mining licence can be increased, which could help in fast-tracking the permitting of any future gold mining operation on the property.
- Valuation – In our note on 24 January 2017 the average of our sum of parts and relative valuation methods generated a target price of US$53.7m, or 44p/share. While our FY17 estimates may need some fine tuning after today’s figures, OMI continues to provide clear evidence of operational improvements across its producing and exploration projects. Hence we maintain our BUY recommendation and current TP of 44p.
- Risks – As a junior mining company, risks associated with OMI include operational risk, commodity pricing and foreign exchange exposure.