The feasibility study for OJVG, located in Senegal, projects a positive net present value of $182 million for $1,000 gold. At $1,200 gold, the NPV is $361 million. The latter price is more realistic. Unfortunately, the present market cap of Orimin at its current price of $1.18 is $159.365 million. The NPV isn't that much higher than the present market cap.
In the release of the feasibility study, it was explained why the NPV was so low relative to the stock price: it has to do with the fact that OJVG has 3.3 million ounces of indicated resources but only 1.42 million ounces of probable reserves. Normally, the gap between the two numbers is much lower. [When a pre-feasibility or feasibility study is conducted, indicated resources get reclassified as probable reserves. There's normally a little shrinkage in the classification, as reserves have to take into account more stringent criteria for economic feasibility.] Only part of the resources were reclassified because the company had to jump ahead in order to get a mining license from the government of Senegal.
Still, even with that factor considered, there isn't a huge gap between the potential NPV and the current market cap.
One thing that Oromin has going for it that few juniors do, is major producers as minority owners. Large chunks of Oromin are owned by IAMGOLD and Mineral Deposits. That bespeaks confidence in the company's flagship project. It also bespeaks takeover potential. Sprott has a chunk of it too.
Unfortunately for Oromin, it might need a tender offer to get its project off the ground. The estimated capital costs to get the 1.42 million ounce project up and running are $291.5 million. In order for the company to finance the project as it is through a private-placement equity offering, it would have to triple its total shares outstanding. That would make the estimated NPV per share not much more than the current price. As it stands, it's going to have to dilute some to make for a complete feasibility study which'll take some more time. If it decides to go ahead with what it has, and expand the feasibility study concurrent with developing the part that's covered by the extent feasibility study, then it will need a lot of hard-to-find capital - about $300 million worth. Almost certainly, an expanded feasibility study will include an expanded initial capital cost.
A company like this, given the high capital cost, actually makes more sense as a takeover candidate. Any takeover would be at a premium, but it's far from a triple given the figures. Oromin is a good company, and a plausible takeover candidate, but...
Here's its one-year chart, from Stockwatch.com:
The Moral Of The Story: Some otherwise big and exciting projects only make economic sense as takeover candidates. That's the case when the capital costs are huge and dwarf the market cap of the company owning them. A back-of-the-envelope analysis of Orimin says that it's one of those companies. It had a big deposit, but not an economically great one. A major producer like IAMGOLD would likely find it accretive to earnings, but only a major could field the capital without major inconvenience. Takeovers are exciting, but they also take out the company. If IAMGOLD announces a tender offer at (say) $1.60, that's only 36% gain from today's price. A good profit, but this company would have to get really lucky for it to be a double. Also: IAMGOLD's part ownership makes Oromin a plausible takeover candidate, but that's far from being a guarantee...including of timing.
Disclosure: None - I don't own a single share.
No comments:
Post a Comment