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Like all gold juniors Ortac Resources (LSE:OTC) has had a fairly miserable year in share price terms. But that does not reflect what has happened on the ground. I tipped this stock at 0.775p in September 2010 and at 0.605p today the company is valued at just £14 million. For reasons I shall explain below that presents an attractive entry point on a risk reward basis.
As it happens I met up with Ortac’s CEO Vassilios Carellas for lunch today. I have known him since he launched Kryso and given that he is of Greek origin we always have a lot to discuss. So what does Ortac own? Well for starters it has net cash and equivalents of just over £7 million. By Christmas it will have published the results of a pre-feasibility study on its Sturec project in the Slovak Republic. During 2013 it will complete a Bankable Feasibility Study on the project. So by the end of next year it will have a BFS in the bag and will still be sitting on cash of £3 million.
What is Sturec? It is a gold deposit with a proven JORC compliant resource of 1.36 million ounces of gold and gold equivalent (silver). Over 1 million ounces are in the measured and indicated category. Based on extensive drilling the belief is that this gold could be extracted via an open pit mine with a 10 year mine life producing 85,000 oz per annum. With relatively little overburden the cash costs would be c$500 oz,
What are the hurdles? First up, there are a few local Guardian reading types who would rather than in an area of high unemployment 350 jobs were NOT created and real wealth brought to the town. These folk have kicked up a fuss in the local press. The bold facts are that Ortac has full permits, most locals support the idea of a mine and at a local, regional and national level the legislative authorities are pro scheme. So this will not be an issue.
What may be more of an issue is how Ortac funds the $150 million or so it will need to build the mine. Given the cash costs this looks like a robust project. At $1200 gold it chucks off $60 million a year, At $1500 gold that number rises to $85 million. So payback is short. However right now raising debt finance is tough. And so there are four scenarios for where Ortac is this time next year:
1. The BFS is not good enough to attract any funding. Ortac may be able to sell the project on to someone for something but is, at worst case, a shell with £3 million cash. That is probably going to be worth 0.2p per share at a minimum. If a 1.3 million ounce resource is worth not a lot then the world is such a mess that a shell with that much cash would be worth a good premium to cash.
2. Ortac struggles to secure debt funding but the BFS shows a very viable project. In which case the project may well be sellable either to a Chinese bidder ( look who has effectively taken control at Kryso) or perhaps to El Dorado, the current hoover up player in gold in Europe. In which case a 1.3 million ounce deposit has to be worth a stack more than the current Enterprise value of £7 million.
3. Carellas can secure a debt and equity package to bring this mine into production. Assuming a 70/30 split you are looking at a £30 million equity component. That is doable if the maths stack up. For argument’s sake let u assume that a positive PFS and then BFS allows a 1 for 1 fund raise at 1.2p to raise £30 million. Existing shareholders get half of a project where the NPV is – even at $1200 gold and using a 10% discount rate – worth $246 million – call it £77 million for existing shareholders (that is 3.3p per share). Using a $1500 gold price that number increases to 5.2p per share.
And so I admit that this is a gamble. In a worst case scenario you lose 66% of your cash if you buy today. In a best case scenario you make a 766% return. As risk reward plays go I have seen far worse.
lol. Do these people get paid?
“As risk reward plays go I have seen far worse.” – Like Athol Gold?