Orion Minerals looking good according to broker
Special Report: The quality of Orion Minerals’ (ASX:ORN) Prieska copper-zinc project in South Africa “remains unappreciated and presents a rare investment opportunity” according to a new research report issued by a leading South African broking firm.
Describing Orion as “an undervalued base metals miner”, Johannesburg-based Vunani Securities says the Prieska ore body is “world-class, as witnessed by the total volume of mineralisation already identified and mined”.
“This is the key foundation of the significant returns achieved from past mining activities from 1971 to 1991 and will also underpin the future mining planned by Orion,” wrote Vunani’s mining analyst, Hurbey Geldenhuys.
A Bankable Feasibility Study for Prieska indicated a post-tax real NPV8%of A$380 million, with the study highlighting “low capital intensity, short lead time, low costs and exceptional returns”.
“The Prieska project centres on the establishment of a 200ktpm copper-zinc mine in the shadow of the former Prieska Copper Mine, which mined the same orebody from 1971 to 1991, delivering 2.5x dividend returns despite persistent low copper and zinc prices over the duration of the mining activity,” wrote Vunani’s mining analyst, Hurbey Geldenhuys.
“Our valuation confirms the ZAR4 billion (A$380 million) valuation for a 10-year project, but building a mine with a 10-year life is not the investment case, in our view.”
“We believe the share price at around SA30cps (A2.8cps) presents an excellent investment opportunity,” the report says.
“We believe the share may at least double to SA60cps on a one-year view, but that the fair value of the company, taking its cash generation capacity into account, is ZA150cps (A14.3c). BUY.”
“Our modelling suggests the Prieska project is worth ZAR7.4 billion (~A$700 million), a significant multiple to the current market value of ZAR600 million (~A$60 million),” the report says.
The Vunani team believes that near-mine exploration results together with demonstrated potential to find additional satellite orebodies means Prieska may have a much longer life.
“For the BFS, Orion used only a portion of the ore resource indicated by the surface drilling,” Geldenhuys says. “Further drilling would have resulted in a larger project, but would have increased cost significantly and delayed the completion of the BFS.”
“We are of the view that Orion will mine the Prieska mine for substantially longer.”
The broker says that drilling results outlined significant further Inferred Resources with the orebody open in many directions.
“In addition, 8mt of pillars were left behind in the old mine, which can now be mined using paste-fill”.
“Finally, it is likely that additional satellite deposits will be found in the vicinity of the mine, in line with proven VMS depositional models.”
“We believe the orebody will sustain free real cash flows of ZAR1.2 billion (A$114 million) per annum for at least 20 years at the projected production, grades, costs and recoveries.”
Vunani says that while Orion Minerals has no direct peer comparison in South Africa (and will be the only base metal miner on the Johannesburg Stock Exchange (JSE) once in production), it does have a very similar peer on the ASX in MOD Resources (ASX: MOD).
MOD Resources is currently being acquired by leading mid-tier copper miner Sandfire Resources (ASX: SFR) via a scheme of arrangement in a transaction worth A$167 million which is due for completion in October this year.
“MOD Resources’ T3 Project BFS and the Orion Prieska Project BFS are similar in many ways, most notably indicating low cost, quick payback, high margin operations,” says Geldenhuys.
“On a peer analysis we conclude that Orion is significantly undervalued at a market capitalisation of around A$60 million.”
He notes that Orion’s share price is today only marginally higher than the levels it was when it was drilling to establish ore reserves.
“We believe there is a large mismatch in the value of the company and the increase in information and reduction of risk,” he says.
“This mismatch cannot be ascribed to the lack of meeting milestones, but perhaps the market is not fully appreciating the short timeframe in which these milestones have been reached.”
Geldenhuys also notes that the quality of Orion Minerals’ project remains unappreciated with the company “largely off the investment radar screen in South Africa” – a situation that “presents a rare investment opportunity”.
“It will be the only direct base metal exposure for investors on the JSE,” Geldenhuys notes.
“We believe the share price at around SA30cps (A2.6c) presents an excellent investment opportunity”.
“We believe the share price may at least double to SA60cps on a one-year view, but that the fair value of the company, taking its cash-generating capacity into account is ZA150cps (A14.2cps). BUY.”