Orosur Mining — Update 19 January 2016

It is notable that while the gold price has decreased 4.2% q-o-q, Orosur’s gross profit has remained at or around break even. This demonstrates the company’s ongoing ability to reduce expenditures as well as maintaining its FY16 production guidance of 30-35koz. On 1 December 2015 Orosur announced a broad swathe of additional cost-cutting measures, comprising reductions in pay and in the workforce, and a reorganisation and streamlining of its management team. Further, the support of the Uruguayan government towards the country’s only operating mine was shown in it waiving royalty payments altogether, for one year. In total, these measures are expected to save Orosur c US$2.0m (with the 3% government royalty calculated at a gold price of US$1,100/oz) in FY16.

Two main development projects are underway at SG. The SG Deeps project is progressing through permitting, with a preliminary permit awarded by the Uruguayan environmental authorities in Q116, and the mining permit being applied for with the local mining authority. While permitting is finalised, Orosur has de-watered the historical SG open pit (this being the original open pit for the SG gold mine). With the pit de-watered, Orosur will extract an initial 1,500oz of gold from the bottom of the historic pit before undertaking preliminary underground (UG) development works, which will comprise connecting the main pit ramp with the designed portal to the underground phase. Material excavated to complete these works carries a grade of between 2g/t and 5g/t (based on limited sampling).

The SG Deeps project is planned to enter its main production phase during Q117 and provide the majority of FY17 gold production.

The second development project is the testing of an extension to the existing Arenal Deeps underground mine. Arenal Deeps has provided the majority of gold production at SG and its structure and geology is therefore well known. The deposit is known to pinch and swell and this knowledge underpins the current scope of works. To complete the investigation of the down-dip extension of Arenal Deeps, a 90m-long tunnel has been driven to provide for suitable drill positions, a standard exercise in underground mines. A 1,100m drill campaign was initiated on 15 December 2015 and is expected to be completed by April 2016.

If an appropriately sized gold resource is defined down-dip of the current Arenal Deeps workings, Orosur intends to develop on to it during FY17.

Orosur’s Anillo project JV partner, Asset Chile (AC), is solely funding the exploration of the project. Under the terms of the November 2014 non-binding farm-in contract, AC is required to provide a decision to Orosur about whether it will initiate tranche two funding totalling US$1.2m by end FY16. While information on the potential for Anillo to mirror that of the world-class projects located nearby (see below) is not yet conclusive, the fact that Orosur is managing to stay active in greenfield exploration at no cost to its own balance sheet is a clear advantage when most of the precious metals miners are significantly decreasing or stopping exploration. Exploration activities will also be married to current and longer-term market conditions/projections, which will likely mean that the resource definition will result in a more robust estimate of in-situ metal content than was achieved during the boom years (resource and reserves estimates have been continually written down in parallel with decreasing metal prices). With global gold production thought to have peaked for the current commodity cycle, the paring back in global exploration spend ultimately leads to an increasingly under-capitalised precious metals sector. Such a situation only provides support to maintaining exploration activities wherever possible.

Anillo sits within Region 2 of Chile, an area host to world-class precious metals mines including Yamana’s (NYSE:AUY) El Peñon underground gold-silver mine, which operates on a cash-cost basis of US$676/oz Au and US$8.39/oz Ag (30 October 2015 Yamana presentation). El Penon, at 31 December 2014, had proven and probable reserves of 1.7Moz of gold and 58.1Moz of silver.

A detailed description of the Anillo Project, commitments and timelines are provided on page 6 of our September Outlook note.

As an indication that Orosur’s management is not just content with producing gold at SG, it is also actively looking into how to progress its assets outside of the Isla Cristalina belt (on which the SG gold mine is situated) and also within Columbia. At this stage no capital has been allocated and assessment is purely conceptual in nature.

Orosur’s management states that for its non-core (to operations at SG) assets outside the Isla Cristalina belt in Uruguay, it may consider agreeing deals whereby third parties are brought in to develop ore reserves of small volumes but high-grade for treatment at the SG processing plant. This would provide cash flow to Orosur without having to incur costly exploration expenditures or capex. However, we highlight that the company would need to structure deals so as not to negatively affect its unit cost base.

Its Columbian asset Anza is highly prospective for high-grade narrow veined gold and minor base metal deposits. Orosur is investigating how to progress this asset and envisages any such development would incur very low capex with a very quick pay-back period.

The Sprott managed SPDR Gold ETF constitutes (as of 14 January 2016) 44.1% of the total known ETF gold holdings recorded by Bloomberg. As such, the Sprott ETF is an important measure of capital investment into this asset type. Significantly, holdings in this ETF increased 3.1% month-on-month at 14 January 2016, with 624,591oz of gold added. This is the first such increase in this fund since August 2015. Continued investment into gold-backed ETFs will only serve to provide support to the gold price and bolster gold’s image as a safe-haven investment.

Our valuation is maintained at £0.28 per share on incorporating H1 results. We have maintained our production profile (ramping to 41koz gold in FY17/FY18 and 51koz in FY19/FY20) but note that the key risk to our valuation lies in any revision to this as Orosur completes optimisation studies on its mining projects at SG. We have slightly adjusted our gold price assumption to reflect December’s actual average gold price of US$1,068/oz (previously US$1,164/oz), we retain all other gold price assumptions as per our September 2015 Outlook note.

For guidance on end FY16 and FY17 net cash positions at US$1,050/oz and US$1,100/oz gold prices, please see the financials section below.

Orosur’s end Q216 cash position was US$2.6m, a reduction of US$2.0m from its end Q116 cash balance of US$4.6m and relates to normal operational expenditures paired with a falling gold price during H116. We forecast that as long as the gold price is maintained at around current levels, based on production costs and expenditures (see below), then the company should finish FY16 with cash of US$2.7m.

Further, from our discussions with management we highlight that during H216:

Our end FY16 and FY17 estimated net cash positions based on our house gold price deck are US$2.7m and US$13.5m respectively. Using a flat gold price of US$1,050/oz these become US$2.5m and US$8.5m, and at a flat gold price of US$1,100/oz become US$2.7m and US$10.0m 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 year to date) rising to 41koz (plus immaterial amounts of silver of c 48koz) in FY17. Note that the FY17 production figure is our estimate and we await management’s guidance on this post FY16 year end.