Orosur Mining
Written by
Orosur Mining |
A return to profit and delivering on guidance |
Q316 results |
Metals & mining |
15 April 2016 |
Share price performance
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Analysts
Orosur Mining is a research client of Edison Investment Research Limited |
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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 |
PBT* |
EPS* |
DPS |
P/E |
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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